Shelby Shelving Case Study

Shelby Shelving Case Study

Shelby Shelving Case Study

Shelby Shelving
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 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.
As usual values in blue cells are given where as other values are calculated from these.
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.
Doug Jameson, 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, Sarah Cranston disagreed.
She 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.”
Your job is to develop an LP Model of Shelby’s problem, then run Solver and finally make a recommendation to Shelby management with a short verbal argument supporting Doug or Sarah.
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 (=
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 in cell G20 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 in cell H20 rounded down to $229).
For this problem you will submit the final product which will be an Excel spreadsheet used to create the model and either a Word document or a Power Point presentation.
The final project will be graded not only on the accuracy of the quantitative solutions, but also the analytical approach used and the presentation of the results.
Keep in mind that this course is designed for individuals interested in Business Management.  As such, the final presentation should be appropriate for a presentation in a professional setting.
It will be necessary to clearly explain the case study and present the results in a professional, yet easily understood manner.
The presentation should clearly state the objective, the constraints in obtaining that objective,
the factors that can be varied, the sensitivity of the model to the variable factors, and the potential weakness of the conclusions.

Accounting Data

Shelby Shelving Data for Current Production Schedule
Machine requirements (hours per unit) Given monthly overhead cost data
Model S Model LX Available Fixed Variable S Variable LX
Stamping 0.3 0.3 800 Stamping $125,000 $80
Chris Albright: Overhead per unit of model S
$90
Chris Albright: Overhead per unit of model LX
Forming 0.25 0.5 800 Forming $95,000 $120 $170
Model S Assembly $80,000 $165 $0
Model S Model LX Model LX Assembly $85,000 $0 $185
Current monthly production 400.0 1400.0
Standard costs of the shelves — based on the current production levels
Hours spent in departments Model S Model LX
Model S Model LX Totals Direct materials $1,000 $1,200
Stamping 120.0 420.0 540.0 Direct labor:
Forming 100.0 700.0 800.0 Stamping $35 $35
Forming $60 $90
Percentages of time spent in departments Assembly $80 $85
Model S Model LX Total direct labor $175 $210
Stamping 22.2% 77.8% Overhead allocation
Forming 12.5% 87.5% Stamping $149 $159
Forming $150 $229
Unit selling price $1,800 $2,100 Assembly $365 $246
Total overhead $664 $635
Assembly capacity 1900.0 1400.0 Total cost $1,839 $2,045

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