Shelby Shelving is a small company that manufactures two types of shelves for gr

Question

Shelby Shelving is a small company that manufactures two types of shelves for grocery stores. Model S is the standard model, and model LX is a heavy-duty model. Shelves are manufactured in three major steps: stamping, forming, and assembly. In the stamping stage, a large machine is used to stamp, i.e., cut, standard sheets of metal into appropriate sizes. In the forming stage, another machine bends the metal into shape. Assembly involves joining the parts with a combination of soldering and riveting. Shelby's stamping and forming machines work on both models of shelves. Separate assembly departments are used for the final stage of production.
The file C13_01.xls contains relevant data for Shelby. (See Figure 1 below.) The hours required on each machine for each unit of product are shown in the range B5:C6 of the Accounting Data sheet. For example, the production of one model S shelf requires 0.25 hour on the forming machine. Both the stamping and forming machines can operate for 800 hours each month. The model S assembly department has a monthly capacity of 1900 units.
The model LX assembly department has a monthly capacity of only 1400 units. Currently Shelby is producing and selling 400 units of model S and 1400 units of model LX per month.
Model S shelves are sold for $1800, and model LX shelves are sold for $2100. Shelby's operation is fairly small in the industry, and management at Shelby believes it cannot raise prices beyond these levels because of the competition. However, the marketing department feels that Shelby can sell as much as it can produce at these prices. The costs of production are summarized in the Accounting Data sheet.
Management at Shelby just met to discuss next month's operating plan. Although the shelves are selling well, the overall profitability of the company is a concern. The plant's engineer suggested that the current production of model S shelves be cut back. According to him, "Model S shelves are sold for $1800 per unit, but our costs are $1839. Even though we're only selling 400 units a month, we're losing money on each one. We should decrease production of model S." The controller disagreed. He said that the problem was the model S assembly department trying to absorb a large overhead with a small production volume. "The model S units are making a contribution to overhead. Even though production doesn't cover all of the fixed costs, we'd be worse off with lower production."

Notes on Accounting Data calculations: The fixed overhead is distributed using activity-based costing principles. For example, at current production levels, the forming machine spends 100 hours on model S shelves and 700 hours on model LX shelves. The forming machine is used 800 hours of the month, of which 12.5% of the time is spent on model S shelves and 87.5% is spent on model LX shelves. The $95,000 of fixed overhead in the forming department is distributed as $11,875 (= 95,000 x 0.125) to model S shelves and $83,125 (= 95.000 x 0.875) to model LX shelves. The fixed overhead per unit of output is allocated as $29.69 (= 11,875/400) for model S and $59.38 (= 83,125/1400) for model LX. In the calculation of the standard overhead cost, the fixed and variable costs are added together, so that the overhead cost for the forming department allocated to a model S shelf is $149.69 (= 29.69 + 120, shown rounded up to $150). Similarly, the overhead cost for the forming department allocated to a model LX shelf is $229.38 (= 59.38 + 170, shown rounded down to $229).

1. The scenario described in Case 13.1 is essentially a cost maximization problem.

A) True

B) False

2. The profit function in this problem is: 1800x + 2100y where x and y denote output for Model LX and Model S respectively.

A) True

B) False

3. Fixed costs in cell G5:G8 are large because each of these costs is a function of output produced.

A) True

B) False

4. Given the resurce constraints provided in this problem it is economically possible for the business to produce at full capacity.

A) True

B) False

1 Shelby Shelving Data for Currerlt Production Schedule 3 Machine requirements (hours per unit) 4 5 Stamping 6 Forming Given monthly overhead cost data Model S Model LX 0.3 0.5 Fixed $125,000 $95,000 $80,000 $85,000 Variable LX $90 $170 $0 $185 Variable S Stamping Forming Model S Assembly Model LX Assembly 0.3 $120 $165 $0 0.25 Model S Model LX 1400 9 Current monthly production 10 11Hours spent in departments 12 13 Stamping 14 Forming 15 16 Percentages of time spent in departments 17 18 Stamping 19 Forming 20 21 Unit selling price 400 Standard costs of the shelves --based on the current production levels Model S $1,000 Model LX $1,200 Model S Model LXTotals 540 800 Direct materials Direct labor: 120 420 700 Stamping Forming Assembly $35 $90 100 $60 $175 S210 Model S Model LX 22.2% 77.8% 12.5% 87.5% Total direct labor Overhead allocation Stamping Forming Assembly $149 $150 $365 $664 $1,839 $159 $229 S246 $635 $2,045 $1,800 $2,100 Total overhead Total cost 23 Assembly capacity 1900 1400

Explanation / Answer

a)False

This is a profit maximization problem. The company is choosing between the production of two models of shelves in order to maximize the profits.

b)

False

The profit function in this problem is 1800x + 2100y where x and y denote output for Model S and Model LX respectively.

c)

False

Fixed costs do not include the costs of output produced. These costs are there even if there is no production.

d)

True

It is economically possible to produce at full capacity, we just need to find the best mix of the two products so that profit will be maximized at the given fixed and variable costs we incur.

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