Pelarsen Windows: Humans v. Robots

Abstract

Pelarsen produces a variety of wood windows ranging from simple standard to very complex architectural windows produced at the company’s old and new plants. The older plants are traditional mass production plants that are labor intensive, have large inventories, and have a lot of spoilage. The newer plants use computer integrated robotics equipment, run a lean operation with small inventories, and have few quality issues. Doug Niedermeyer, manager of an older plant, is complaining that his plant’s poor profitability is caused by the lack of new robotics equipment and wants more high margin architectural window business. His claim is supported by plant profit projections based on the cost data from his plant’s volume-based accounting system. However, a deeper analysis of his plant’s production processes, capacity utilization, quality capability, inventory levels, and spoilage rates suggests that he can take many short-term actions to increase profits and that his real profitability problem may lie in the mismatch among his production processes, product mix, and cost structure.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Resources

Exhibit 1: Projected Texas Plant Product Line Income Statements for 2008: Prepared for Doug Niedermeyer

Standard

Percent

Architectural

Percent

Total

Revenue

$81,000,000

100.0%

$40,750,000

100.0%

$121,750,000

Variable Costs

Wood

31,129,313

38.4%

11,264,688

27.6%

42,394,000

Glass

15,012,422

18.5%

9,530,078

23.4%

24,542,500

Cladding, Hardware, etc.

6,750,000

8.3%

7,250,000

17.8%

14,000,000

Total Materials Cost

52,891,734

65.3%

28,044,766

68.8%

80,936,500

Wages, Skilled Carpenters

13,253,625

16.4%

2,454,375

6.0%

15,708,000

Wages, Helpers

6,834,375

8.4%

1,265,625

3.1%

8,100,000

Total Wages

20,088,000

24.8%

3,720,000

9.1%

23,808,000

Variable Overhead

1,635,268

2.0%

898,065

2.2%

2,533,333

Total Variable Costs

74,615,002

32,662,831

107,277,833

Contribution Margin

6,384,998

8,087,169

14,472,167

Fixed Production Overhead

6,182,367

7.6%

1,144,883

2.8%

7,327,250

Marketing and G&A Costs

2,700,000

3.3%

500,000

1.2%

3,200,000

Accounting Profit

-2,497,369

-3.1%

6,442,286

8.0%

3,944,917

Capital Charge

5,128,500

Economic Profit

-$1,183,583

Controller’s Notes:

  • The projected plant income statement above employs the standard costs and revenues for the plant, as detailed in Exhibits 1B to 1H, below, but assumed production of 270,000 standard windows and 50,000 architectural windows, as shown in the schedule labeled Exhibit 1A.
  • Wood and glass cost projections in the projected income statement include the standard cost of material as shown in Exhibit 1B plus the cost of spoilage, scrap, and rework at recent historical levels (see Exhibit 1H). These additional costs have been allocated to product lines based on the production volume (84% and 16%) of each window type.
  • Similar to materials, skilled labor costs in the projected income statement include the standard labor cost as shown in Exhibit 1C plus the cost of rework at recent historical levels (see Exhibit 1H). The rework costs have been allocated to product lines based on the production volume (84% and 16%) of each window type.
  • Variable overhead costs in the projected income statement employ the standard variable cost rates shown in Exhibit 1D, adjusted for rework at recent historical levels (see Exhibit 1-H). The rework costs have been allocated to product lines based on the production volume (84% and 16%) of each window type.
  • Fixed overhead costs in the projected income statement are based on amounts budgeted at the beginning of each year, detailed in Exhibit 1E, and allocated based on the production volume (84% and 16%) of each window type.
  • Marketing costs are estimated to be $3.2 million (see Exhibit 1F) and they have been allocated based on the production volume (84% and 16%) of each window type.
  • Spoilage, breakage, and rework percentages in Exhibit 1H are expressed as % of final output (270,000 and 50,000 windows). For architectural windows, 3% of the broken glass is replaced at the plant while the remaining 12% is replaced at the customer site by a skilled carpenter who takes on average 2 hours to do this.

Exhibit 1A: Standard Revenues Schedule

Standard

Percent of Total Units

Architectural

Percent of Total Units

Units Produced & Sold

270,000

84%

50,000

16%

Average Per Unit Selling Price

$300.00

$815.00

Exhibit 1B: Standard Material Cost Schedule

Standard

Percent of Sales Price

Architectural

Percent of Sales Price

Wood

110.00

36.7%

220.00

27.0%

Glass

50.00

16.7%

185.00

22.7%

Cladding, Hardware, etc.

25.00

8.3%

145.00

17.8%

Total Materials Cost

185.00

61.7%

550.00

67.5%

Exhibit 1C: Standard Labor Cost Schedule

Paid Hours per Day

8

Paid Days per Year

250

Paid Labor Hours per Worker/Year

2,000

Hourly Wages + Benefits – Skilled Carpenters

$34.00

Hourly Wages + Benefits – Carpenter Helpers

$18.00

Labor Hours – Skilled Carpenters

450,000

Labor Hours – Helpers

450,000

Labor Hours – Standard Windows

578,571

Labor Hours – Complex Windows

321,429

Total Labor Hours

900,000

Exhibit 1D: Standard Variable Overhead Schedule

Budgeted Variable Overhead Cost

$2,500,000

Budgeted Labor Hours

900,000

VOH Rate

2.78 per DLH

Exhibit 1E: Standard Fixed Overhead & Other Costs Schedule

Salaries, Support and Supervisory

$1,875,500

Occupancy Costs (rent, furniture, etc.)

4,125,000

Equipment and Tools Depreciation

539,250

Other Depreciation

787,500

Total Fixed Overhead

7,327,250

Exhibit 1F: Marketing, Distribution, and G&A Costs

Employees

Space Used

Sales Account Representatives

6.00

9.00%

$900,000

Order Entry Clerks

4.00

7.00%

165,000

Shipping and Packing Salaries

6.00

46.00%

300,000

Billing Associate Salaries

5.00

18.00%

235,000

General Administrative Staff Salaries

12.00

20.00%

1,058,000

Packing Materials and Supplies

21,000

Annual Furniture and Fixtures Depreciation

205,000

Building Rent, Heat, and Other Occupancy Costs

316,000

100.00%

$3,200,000

Exhibit 1G: Texas Plant Asset Base and Capital Charge

Ratios

Cash

$2,000,000

5.91

days of sales

Receivables

9,500,000

28.09

days of sales

Inventories

12,000,000

53.38

days of materials cost

Machine Tools & Equipment

7,190,000

Other Fixed Assets

10,500,000

Total Assets

41,190,000

Less Accounts Payable

7,000,000

23.49

days of materials + labor+ VOH

Net Investment

$34,190,000

Weighted Average Cost of Capital

15%

Capital Charge

$5,128,500

Exhibit 1H: Texas Plant Asset Base and Capital Charge

Standard

Architectural

Wood Loss or Spoilage

2%

10%

Glass Breakage

3%

15%

On-site Replacement of Broken Glass

12%

Hours Needed to Replace On-site Glass

2.00

Exhibit 2: Projected Income Statement for Oregon (Based on Niedermeyer’s Suggested Production Schedule)

Standard

Architectural

Total

Percent

Units Produced & Sold

130,000

180,000

Average Per Unit Selling Price

$300.00

$815.00

Variable Costs as Percent of Sales

79.2%

74.0%

Net Assets (Investment Base)

40,151,807

Weighted Average Cost of Capital

15%

Revenue Current

39,000,000

146,700,000

185,700,000

Variable Costs

30,875,000

108,514,853

139,389,853

Contribution Margin

8,125,000

38,185,147

46,310,147

25%

Total Fixed Costs

6,729,460

12,599,474

19,328,933

Accounting Profit

1,395,540

25,585,674

26,981,214

15%

Capital Charge

6,022,771

Economic Profit

$20,958,443

11%

Exhibit 3: Process and Process Times for Production of Standard Windows at the Texas Plant

  • Cutting and Shaving: The cutting and shaving process cuts wood pieces into the correct window size and smoothes them. This batch process accommodates 8 units of production within each batch. The set-up time required to align wood for each frame is 1.5 minutes. Following alignment, it takes 44 minutes of cutting and shaving time for each batch of 8. There are 12 workers and 6 cutting-shaving machines dedicated to this process – i.e., 2 workers per machine.
  • Forming: The forming process shapes the wood pieces into the correct window styles (examples: bay windows, arches, transoms). The forming machine processes batches of 6 windows. This batch process requires 3 minutes to load each window onto the forming machine. Following loading of the 6 windows, it requires 43 minutes of forming time per batch of 6. There are 16 workers and 8 forming machines dedicated to this process.
  • Inserting Glass: Glass insertion requires 7.7 minutes of processing time per window. Each window must be processed individually at this step and in all remaining steps (steps 4-8) in the window fabrication process. There are 6 machines and 6 workers at this process step.
  • Attaching Hardware: There are 12 machines and 12 workers at this process step. Each window requires 15.2 minutes of processing time to complete the hardware attachment process step.
  • Applying Primer Coat: There are 10 machines and 10 workers at this process step. Each machine requires 12.0 minutes of processing time per window.
  • Installing Cladding: There are 6 machines and 12 workers at this production step. Each machine requires 7.4 minutes of processing time per window.
  • Inspection: There are no machines at this step. There are 12 inspectors, each of whom works independently (i.e., one worker per window inspection). Each worker requires 14.0 minutes to thoroughly inspect a window.
  • UPC application, bar code scanning, and packing for shipment: A single machine applies the UPC code, scans the code, shrink wraps the window, and packages the units for shipping. It requires 2 workers to operate this machinery, 1 to guide the flow of units into the machine and 1 to remove the packaged units. There are 5 machines and 10 workers at this production step. Each machine processes a unit every 6.0 minutes.

Exhibit 4: Processing Times for Architectural Windows at the Texas Plant

Fabrication of architectural windows at the Texas plant follows the exact same 8-step process as fabrication of standard windows. The only difference is the amount of time required to complete each step, which is generally longer for architectural windows as compared to standard windows and the batch size in steps #1 and #2. Each processing line has the same number of workers and machines at each step. As noted in the case, a given production line can only produce one type of window – either standard or architectural – at any given time. When computing operating capabilities for architectural windows, the consultants should assume the same 8 steps with the same number of machines and workers as detailed above in Exhibit 3. However, the processing times will be different. For processing time at each step, architectural window require:

  • The batch size is reduced to 4 for architectural windows. Alignment time increases to 5 minutes per window. Processing time for the batch of 4 is 55 minutes for architectural windows.
  • The batch size is again 4 for architectural windows. Loading time per window is now 4 minutes and processing time for the batch of 4 is 43 minutes.

    Steps 3-8 are identical to steps 3-8 in Exhibit 3, but the processing times for architectural windows are different. The process times for architectural windows are as follows:

  • 15 minutes per window
  • 30 minutes per window
  • 24 minutes per window
  • 10 minutes per window
  • 14 minutes per window
  • 6 minutes per window

Exhibit 5: Operations at the Oregon Plant

The Oregon plant is highly automated and makes extensive use of robotics in the fabrication of windows. The automation utilized in the Oregon plant creates a production system that has the same processing times, thus the same capacity, for both standard and architectural windows. The majority of the production line is automated and controlled by robotics. There are three steps requiring workers-machines that precede the movement of product into the automated line and one step at the end of the automated line where workers simply remove completed windows from the line and place them in shipping containers.

  • Pre-fabrication step #1: There are 6 machines and 6 workers at this step. These workers load the window components onto the automated line. The processing time per window is 2.4 minutes.
  • Pre-fabrication step #2: There are 6 robotic machines and 3 workers at this step. These machines properly align the components before feeding into the automated fabrication system and each worker can monitor 2 machines. The processing time per window is 2.45 minutes.
  • Pre-fabrication step #3: There are 6 robotic machines and 3 workers at this step. These machines feed the aligned components into the automated fabrication system and each worker can monitor 2 machines. The machines are sequenced so that there is a constant flow of components into the automated system. The processing time per window is 2.5 minutes.
  • Automated-robotic fabrication line: This is a fully automated fabrication system consisting of a series of robots that fully fabricate, finish, stamp, shrink-wrap, and package the windows. No production calculation is required here as the robotics control production. The robotic line is rated at a maximum production capacity of 1,150 windows per day.
  • Post-fabrication step: There are 6 workers at this step. The workers remove the fully fabricated, packaged windows from the production line and place them in the appropriate shipping containers. Each worker operates independently and requires 2.4 minutes of processing time per window.

Exhibit 6: Process Data Standard Window Production at the Texas Plant

Process specifications for Standard Windows are: 0.250 plus or minus .03

Unit #

Unit #

Unit #

Unit #

1

0.265

21

0.251

41

0.247

61

0.252

2

0.25

22

0.248

42

0.257

62

0.251

3

0.261

23

0.248

43

0.239

63

0.246

4

0.245

24

0.251

44

0.245

64

0.25

5

0.239

25

0.263

45

0.265

65

0.251

6

0.247

26

0.245

46

0.25

66

0.248

7

0.251

27

0.242

47

0.266

67

0.251

8

0.248

28

0.247

48

0.245

68

0.254

9

0.248

29

0.251

49

0.233

69

0.247

10

0.251

30

0.248

50

0.247

70

0.257

11

0.262

31

0.251

51

0.251

71

0.239

12

0.245

32

0.254

52

0.248

72

0.245

13

0.236

33

0.247

53

0.251

73

0.265

14

0.247

34

0.257

54

0.254

74

0.25

15

0.251

35

0.239

55

0.247

75

0.266

16

0.248

36

0.245

56

0.257

76

0.245

17

0.248

37

0.265

57

0.239

77

0.233

18

0.251

38

0.25

58

0.245

78

0.247

19

0.266

39z

0.266

59

0.265

79

0.25

20

0.245

40

0.245

60

0.25

80

0.25

Exhibit 7: Process Data Architectural Window Production at the Texas Plant

Process specifications for Architectural Windows are: 0.250 plus or minus .025

Unit #

Unit #

Unit #

Unit #

1

0.2655

21

0.2625

41

0.2525

61

0.2535

2

0.2615

22

0.2305

42

0.2625

62

0.2535

3

0.2625

23

0.2325

43

0.2445

63

0.2565

4

0.2305

24

0.2535

44

0.2505

64

0.2555

5

0.2325

25

0.2485

45

0.2705

65

0.2565

6

0.2535

26

0.2275

46

0.2735

66

0.2535

7

0.2485

27

0.2535

47

0.2695

67

0.2735

8

0.2275

28

0.2645

48

0.2705

68

0.2695

9

0.2535

29

0.2565

49

0.2385

69

0.2705

10

0.2645

30

0.2275

50

0.2405

70

0.2385

11

0.2565

31

0.2305

51

0.2615

71

0.2405

12

0.2275

32

0.2365

52

0.2565

72

0.2615

13

0.2305

33

0.2565

53

0.2355

73

0.2565

14

0.2365

34

0.2455

54

0.2615

74

0.2355

15

0.2565

35

0.2455

55

0.2725

75

0.2615

16

0.2455

36

0.2485

56

0.2645

76

0.2725

17

0.2455

37

0.2625

57

0.2355

77

0.2645

18

0.2485

38

0.2495

58

0.2385

78

0.2355

19

0.2655

39

0.2655

59

0.2445

79

0.2385

20

0.2615

40

0.2445

60

0.2645

80

0.2445

Exhibit 8: Benchmarking Data for Millwork Industry

Item

Percent of Revenue

Average Selling Price per Unit

100.0%

Purchased Materials and Parts

64.5%

Labor Cost

16.2%

Depreciation

1 .2%

Utilities

0.8%

Rent

1.1%

Other*

6.2%

Profit

10.0%

Receivable Turnover

20.00 days

Inventory Turnover

15.00 days

Accounts Payable Turnover

30.00 days

*includes .05% of waste and spoilage cost

Exhibit 9: Process Cost Data for Texas

Resources Used by Activities

Cut & Plane

Form & Shape

Insert Glass

Attach Hardware

Apply Primer

Install Cladding

Inspect

Stamp & Bar Code

Total

Skilled Workers

30

40

15

30

25

30

30

25

225

Hours Per Year

60,000

80,000

30,000

60,000

50,000

60,000

60,000

50,000

450,000

Unskilled Workers

30

40

15

30

25

30

30

25

225

Hours Per Year

60,000

80,000

30,000

60,000

50,000

60,000

60,000

50,000

450,000

Total Labor Hours

120,000

160,000

60,000

120,000

100,000

120,000

120,000

100,000

900,000

Square Footage

20,000

12,000

15,000

15,000

13,000

9,000

4,000

12,000

100,000

Supervisory/Support Staff

13

16

8

6

6

3

4

4

60

Total Machinery Cost

1,050,000

840,000

900,000

2,100,000

675,000

750,000

875,000

7,190,000

Annual Depreciation Rate

7.5%

Depreciation Expense

78,750

63,000

67,500

157,500

50,625

56,250

65,625

539,250

Resource Drivers

Direct Labor

Traced directly to process steps by direct labor hours

Variable Overhead

Assigned to process steps based on direct labor hours

Supervisor & support salaries

Assigned to process steps based on percentage of total supervisor/support headcount

Occupancy costs

Assigned to process steps based on percentage of square footage occupied

Machinery Depreciation

Traced directly to process steps

Other Depreciation

Assigned to process steps based on percentage of total supervisor/support headcount

Activity Drivers Used by Products

Per Window

Total

Standard

Architectural

Number of Saw Cuts

2,520,000

6.0

18.0

Skill Saw Time

470,000

1.0

4.0

Glass Insert Time Units*

840,000

2.0

6.0

Hardware Pieces Attached

940,000

2.0

8.0

Paint Gun Hours

185,000

0.5

1.0

Number of Units Clad

106,000

0.3

0.5

Number of Items Inspected

18,500

0.05

0.1

Number of Windows Produced

320,000

1.0

1.0

Exhibit 10: Sales, Administration, and Distribution Activities Cost Data for Texas Plant

Sales and Administrative Cost and Resource Drivers

Equivalent Headcount

Space Used

Salaries Paid

Sales Account Representatives

6.00

9.00%

$900,000

Order Entry Clerks

4.00

7.00%

165,000

Shipping and Packing Salaries

6.00

46.00%

300,000

Billing Associate Salaries

5.00

18.00%

235,000

General Administrative Staff Salaries

12.00

20.00%

1,058,000

Packing Materials and Supplies

100.00%

21,000

Annual Furniture and Fixtures Depreciation

205,000

Building rent, heat, and other occupancy costs

316,000

Total

33.00

$3,200,000

Sales and Administrative Resources Used by Activities

Call on Customers

Process Orders

Pack & Ship

Bill Accounts

General Admin

Total

Salaries and Wages

$900,000

$165,000

$300,000

$235,000

$1,058,000

$2,658,000

Packing Supplies and Boxes

$21,000

$21,000

Equipment Depreciation

$37,273

$24,848

$37,273

$31,061

$74,545

$205,000

Occupancy Costs

$28,440

$22,120

$145,360

$56,880

$63,200

$316,000

Total Activity Cost

$965,713

$211,968

$503,633

$322,941

$1,195,745

$3,200,000

Activity Drivers Used by Products

Per Window

Total

Standard

Architectural

# Customer Contact Hours

33,500

17,500

16,000

# Orders

21,000

13,300

1,700

# of Boxes Packed

53,000

27,000

26,000

# of Billing Transactions*

22,000

16,000

6,000

Note:*Activity Cost Driver for both Bill Accounts and General Administrative Activities

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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