Lehigh Steel

1045 WordsMay 10, 20115 Pages
Memo To: Jack Clark Cc: Mozaffar Khan, Derek Johnson From: Mauricio Sadi Andrade Date: March 15, 2010 Subject: Lehigh 's 1993 product mix EXECUTIVE SUMMARY The objective of this memo is to recommend you a product mix for Lehigh in the year of 1993 based on profit calculations and other business considerations. Recommendation: 1993 product mix should include only High Speed Based on an approach resultant from the combination of ABC plus Theory of Constraints (TOC), I recommend that the company include only the High Speed (machine coil) in its mix. The table bellow contains the unitary cost for Standard and ABC and the throughput per unit of the constrained resource ($/min), calculated diving the unitary ABC cost ($/lb)…show more content…
Number of skus was considered driver for Technical Support. The product weight was considered driver of resource consumption only for General & Administrative costs. Moreover, materials and direct labor were allocated based on the bill of materials and routings (exactly the way they were allocated in Standard Costing system). Finally, Material Handling & Setup, Order Processing and Production Planning were driven to products using number of orders. Consequently, ABC solves the major issue regarding the Standard Costing system: the assumption that all overhead costs can be included into one cost pool. All the drivers are summarized in exhibit 3. Exhibits 4 and 5 present respectively the ABC drivers and allocation rates. The calculations for this alternative are presented in exhibit 6. According to this approach, alloys, roller wires and chipper knives present operating losses, while only high speeds and round bars showed operating profits: $0.15 and $0.01 per pound. However, ABC does not take into consideration how smoothly material flowed through the plant and product profitability should reflect this kind of difference in resource consumption. This is the reason why this alternative was not selected. TOC approach In this third approach, it was proposed a simple operational measure to orientate the decision-making process within the company: Throughput. It was calculated as sales less material cost (“contribution

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