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Dec 6, 2023

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13-20 See spreadsheet. 13-23 See spreadsheet. 13-45 Theory of Constraints; Strategy Colton Furniture Co. is a small but fast-growing manufacturer of living room furniture. Its two principal products are end tables and sofas. The flow diagram for the manufacturing at Colton follows. Colton’s manufacturing involves five processes: cutting the lumber, cutting the fabric, sanding, staining, and assembly. One employee cuts fabric and two do the staining. These are relatively skilled workers who could be replaced only with some difficulty. Two workers cut the lumber, and two others perform the sanding operation. There is some skill to these operations, but these skills are less critical than those for staining and fabric cutting. Assembly requires the lowest skill level, and there is currently a total of 175 hours of working time per week provided by a single full-time employee plus some part-timers. The other employees work a 40-hour week, with 5 hours off for breaks, training, and personal time. Assume a 4-week month and that, by prior agreement, none of the employees can be switched from one task to another. The current demand for Colton’s products and sales prices are as follows, although Colton expects demand to increase significantly in the coming months if it is able to successfully negotiate an order from a motel chain. Required 1. Which of the activities is the constraint? See spreadsheet 2. Using the constraint identified in requirement 1, calculate the throughput margin per hour for each product. See spreadsheet 3. Given the results to requirements 1 and 2, how many of each product should be produced? See spreadsheet 4. How would you apply steps 3 through 5 of the theory of constraints to Colton’s manufacturing operations? What would you recommend for each step? 5. For step 3, I would recommend performing a Takt time study for Colton’s to understand how much time should ideally be spent on each process to optimize overall production. Without even performing an analysis, it’s already clear that too much personnel is concentrated in the assembly step. Slack hours are equal to a whole week of working time.

In step 4, is where the company should look at reducing spending on part-time employees and replacing them with a full-time employee in the staining process. Since staining is a skilled process, automation would likely be out of consideration in the short-term, but the company can review less skilled areas that can be automated and possibly free up labor to move to the constraint. In step 5, the company should perform a total review of the process to identify areas of optimization. They can either look at additional training to improve employee skills and reduce work time, consider additional areas for automation or adding advanced machinery, and possibly redesigning the products for ease of production. 13-48 Life-Cycle Costing Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line profitability analysis for her firm’s two products, Xderm and Yderm. The two skin care products require a large amount of research and development and advertising. After receiving the following statement from BioDerm’s accountants, Kate concludes that Xderm is the more profitable product and that perhaps cost- cutting measures should be applied to Yderm: Required 1. Explain why Kate may be wrong in her assessment of the relative performance of the two products. Kate’s initial conclusion does not take into consideration the distribution of R&D costs and selling expenses for each product. Without applying these costs, it cannot be definitively known which product yields a higher profit before taxes. 2. Suppose that 75 percent of the R&D and selling expenses are traceable to Xderm. Using this assumption, compute the life-cycle income for each product and the return on sales for each product. See spreadsheet 3. Consider your answers to requirements 1 and 2 with the following additional information: R&D and selling expenses are substantially higher for Xderm because it is a new product. Kate has strongly supported development of the new product, including the high selling and R&D expenses. She has assured senior managers that the Xderm investment will pay off in improved profits for the firm. What are the ethical issues, if any, facing Kate as she reports to top management on the profitability of the firm’s two products? 4. As Kate has advocated for increased spending on the new product, she will feel incentivized to report favorable profits to maintain a good impression with top management and possibly greater compensation. If Kate reports on Xderm being the more profitable product and advocates for cost-cutting measures to be applied to Yderm, then she would be violating the IMA ethical standards of competence, integrity, and credibility. Failing to gain all relevant cost information would mean providing reports and recommendations that are inaccurate. As already mentioned, taking such actions would be an unethical move to ensure Kate’s own personal gains and, if discovered, would discredit her role. And finally, this information would be neither fair nor objective, and would greatly influence management’s interpretation of the situation.

17-47 Quality Cost Classification Required Classify each of the following costs into one of the four quality cost (i.e., COQ) categories: 1. Materials, labor, and overhead costs of scrapped units. Internal failure 2. Engineering time spent to determine the causes of failures to meet product specification. Internal failure 3. Wages and salaries for the time spent by workers to gather quality measurements. Appraisal 4. Information systems costs expended to develop data requirements. Appraisal 5. Clerical staff expenses to coordinate training programs. Prevention 6. Salaries for members of problem-solving teams. Prevention 7. Payment to settle a product-liability lawsuit . External failure 17-68 Relevant Costs and Quality Improvement Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The firm has an 85% on-time delivery rate. Thirteen percent of the items are misplaced and the remaining 2% are lost in shipping. On average, the firm incurs an additional $65 per item to track down and deliver misplaced items. Lost items cost the firm about $300 per item. Last year, the firm shipped 6,000 items with an average freight bill of $200 per item shipped. The firm’s manager is considering investing in a new scheduling and tracking system costing $125,000 per year. The new system is expected to reduce misplaced items to 1% and lost items to 0.5%. Furthermore, the firm expects total sales to increase by 10% with the improved service. The average contribution margin ratio on any increased sales volume, after cost savings associated with a reduction in misplaced and lost items, is expected to be 37.5%.

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