CASE - FIVE STAR TOOLS

Five Star Tools is a small family-owned firm that manufactures diamond-coated cutting tools (chisels and saws) used by jewelers. Production involves three major processes. First, steel "blanks" (tools without the diamond coating) are cut to size. Second, the blanks are sent to a chemical bath that prepares the tools for the coating process. In the third major process, the blanks are coated with diamond chips in a proprietary process that simultaneously coats and sharpens the blade of each tool. Following the coating process, each tool is inspected and defects are repaired or scrapped.

In the past two years, the company has experienced significant growth and growing pains. The company is at capacity in the coating and sharpening process, which requires highly skilled workers and expensive equipment. Because of the bottleneck created by this operation, the company has missed deadlines on orders from several important customers. Maxfield Turner, the son of Frederick Turner, founder of Five Star Tools, is the president of the company. Over lunch he and Betty Spence, vice president of marketing, discussed the situation. "We've got to do something," Betty began. "If we don't think we can meet a customer's order deadline, we should turn down the business. We can't simply keep customers waiting for product or we'll develop are putation as an unreliable supplier. You know as well as I do that this would be devastating to our business."

"I think there may be another approach, Betty," replied Max. "Some of our products are exceptionally profitable. Maybe we should concentrate on them and drop some of the less profitable ones. That would free up our production resources. Or maybe we can figure out a way to run more product through the coating process.

If we could just loosen that constraint, I know we could improve our response time and profitability. I'll tell you what I'll do. I'll get the accounting department to prepare an analysis of product profitability. That should help us figure out which products to concentrate on. And I'll get the production people thinking about how to free up some time in coating. We'll meet early next month and try to get a handle on how to deal with our production constraints."

Required

a. What steps can be taken to loosen the constraint in coating and sharpening?

Based on this information, estimate the incremental profit per year associated with adding the new inspection station.

                                                                       Model C210 Chisel                         Model D400 Chisel

Selling price                                                                       $500                                              $850

Less variable costs:

Direct labor                                                        $ 85                                               $ 180

Direct material                                                    150                                                  180

Variable overhead                                                 15            250                                 60           420

Contribution margin                                                              250                                                430

Less allocated fixed costs                                                      185                                                 230

Profit per unit                                                                      $65                                                 $200

Time in coating and sharpening to produce 1 unit    .2 hours                                             .8 hours