Case
Teaching Notes
Supplementary Resources
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.
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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