Lehigh Steel
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) by the machine time for the rolling process (lb/min):
The following paragraphs present a deeper analysis to allow comprehension of the logical steps that led to this recommendation.
Rationale: ABC and TOC combined approach
The major idea behind combining ABC and TOC approaches is to come up with a fourth method of calculating profits that overcomes the shortcomings of the other three methods (Standard, ABC and TOC).
Based on the ABC model (see description of this model in the next section of this report: Alternatives Rejected), I calculated the unitary operating profit per product. This operating profit eliminates the major issue concerning the Standard Costing system: to average uneven resource consumption across products.
The next step was to incorporate the concept of time as a factor used in Lehigh’s decision-making. First, by obtaining information from the operations staff, I defined the CRM as the constraint of the plant. Then, I calculated the throughput per unit of the constrained process (Rolling - CRM) by diving the unitary ABC cost ($/lb) by the machine time for the rolling process (lb/min).
Exhibit 1 presents the results for these calculations. According to this approach, alloys, roller wires and chipper
To: Jack Clark
Cc: Mozaffar Khan, Derek Johnson
From: Mauricio Sadi Andrade
Date: March 15, 2010
Subject: Lehigh 's 1993 product mix
EXECUTIVE SUMMARY
The objective of this memo is to recommend you a product mix for Lehigh in the year of 1993 based on profit calculations and other business considerations.
Recommendation: 1993 product mix should include only High Speed
Based on an approach resultant from the combination of ABC plus Theory of Constraints (TOC), I recommend that the company include only the High Speed (machine coil) in its mix.
The table bellow contains the unitary cost for Standard and ABC and the throughput per unit of the constrained resource ($/min), calculated diving the unitary ABC cost ($/lb) by the machine time for the rolling process (lb/min):
The following paragraphs present a deeper analysis to allow comprehension of the logical steps that led to this recommendation.
Rationale: ABC and TOC combined approach
The major idea behind combining ABC and TOC approaches is to come up with a fourth method of calculating profits that overcomes the shortcomings of the other three methods (Standard, ABC and TOC).
Based on the ABC model (see description of this model in the next section of this report: Alternatives Rejected), I calculated the unitary operating profit per product. This operating profit eliminates the major issue concerning the Standard Costing system: to average uneven resource consumption across products.
The next step was to incorporate the concept of time as a factor used in Lehigh’s decision-making. First, by obtaining information from the operations staff, I defined the CRM as the constraint of the plant. Then, I calculated the throughput per unit of the constrained process (Rolling - CRM) by diving the unitary ABC cost ($/lb) by the machine time for the rolling process (lb/min).
Exhibit 1 presents the results for these calculations. According to this approach, alloys, roller wires and chipper