Five Star Tools Case Study
Five Star Tools
Managerial Accounting: BUS 5431
Kimberly Albino
August 13, 2015
Five Star Tools
Five Star Tools is a family owned company that manufactures chisels and saws (diamond-coated cutting tools) used by jewelers. To produce these tools for jewelers, they use a three step process. For the past 2 years, Five Star Tools have been experiencing remarkable growth and have come across a constraint that is making them question their manufacturing process. This constraint is causing them to not meet their deadlines for many important customer orders while making the company look unreliable and destroying their reputation. After a close look over the manufacturing process, management has been able to pin point what exactly the constraint is; bottle neck created in the coating and sharpening process.
The founder of Five Star Tools as well as the President of the company, Maxfield Turner, sat alongside of Betty Spence, vice president of marketing, at lunch while they debated and decided that something must be done. While overviewing the missed deadlines and production capacity, Betty made clear that she believes the company should stop accepting orders and turn down the business to forgo the bad reputation the company will build for itself by not meeting the customer’s deadlines. She wants to maintain the ‘good’ reputation Five Star Tools has withheld thus far. The president and founder of the company, Maxfield Turner, is in favor of loosening the constraints by concentrating on the more profitable products and drop the less profitable ones or find a proficient way to run more product through the coating process at a faster rate to decrease time. He would like to get the accounting department involved by reviewing the and preparing an analysis of product probability to better help them decide which products are more profitable to the company so that they will be able to free up time in the coating department. A meeting will be held within a months’ time to learn how to deal with the constraint based on the analysis presented by the accounting department.
In order to overcome this constraint being experienced by Five Star Tools, the company must use Goldratt’s Theory of Constraints. The first step of the TOC has already been successfully mastered by identifying the constraint as the coating and sharpening department, an area in which requires highly skilled workers and expensive equipment. The second step to this process would be to optimize the use of the constraint. This simply means to establish which products to produce with the highest contribution margin per unit of the constraint (Jiambalvo,2010). Model C210 would be the model to highlight if the constraint is inoperable in the coating and sharpening department. Model C210 compared to Model D400 displays a higher contribution margin per unit which means its benefit of $1,250 trumps the benefit of only $537.50 produced by Model D400. Since the optimizing process is completed, the next step would be to solve this issue. By adding an inspection station before the coating and sharpening process. This would create saved time in the coating and sharpening operations and could be run by an already employed personnel who would not generally be missed for a short period of time on occasions, which would save Five Star tools finance in the staffing department. By doing so, Five Star Tools will free up 240 hours in the coating and sharpening department. The average 5 minutes for day* 8 hours a day*365 days in a year/ 60 leaves us with the average CM per hour of $850. Using this information we can analyze that the 240 hours saved times the CM per hour,$850) will give us the incremental profit. With that being said, the new inspection station would be respectfully associated with an incremental profit per year of $204,000 (240 hours saved*$850).