Shelby Shelving Case Study: Analyzing Production And Profit

Shelby Shelving Case Study: Analyzing Production and Profitability

Shelby Shelving is a small manufacturing company producing two types of shelves for grocery stores: the standard Model S and the heavy-duty Model LX. The company's production process involves three main stages: stamping, forming, and assembly. In the stamping stage, large machines cut metal sheets into appropriate sizes; in the forming stage, another machine bends the metal into the desired shape; and in the assembly stage, parts are joined through soldering and riveting. Both models utilize the same stamping and forming machines, while dedicated assembly departments handle the final assembly for each model.

Current production levels are 400 units of Model S and 1,400 units of Model LX per month. Model S shelves are sold at $1,800 each, and Model LX shelves at $2,100. Despite selling well, profitability concerns have arisen because of the costs associated with producing Model S shelves, which are currently selling at a price slightly below their calculated total cost. The plant's engineer, Doug Jameson, suggests reducing the production of Model S because of its unprofitability. Conversely, the controller, Sarah Cranston, argues that even though current production does not cover all fixed costs, the contribution from Model S shelves helps absorb overhead, and decreasing output might hurt overall profitability.

Key Production Constraints and Data

The available machine hours are 800 hours per month each for stamping and forming machines. The production of one Model S shelf requires 0.3 hours on the stamping machine and 0.25 hours on the forming machine. For Model LX, the required times are similar for stamping but not explicitly specified in the brief excerpt; they are based on the detailed data provided in the full case.

Assembly capacities are 1,900 units for Model S and 1,400 units for Model LX monthly. The fixed overhead costs are allocated using activity-based costing, with the total fixed overhead costs for forming estimated at $95,000, distributed between the models based on machine hour usage—forming 12.5% on Model S shelves and 87.5% on Model LX. The fixed overhead is apportioned at $29.69 per unit for Model S and $59.38 per unit for Model LX, considering current production levels.

Cost and Revenue Analysis

The variable costs include direct materials and direct labor, with unit costs of $1,000 and $1,200 respectively for Model S, and $1,200 and $1,200 for Model LX. The total costs per unit, combining variable and allocated fixed overhead, are approximately $1,839 for Model S and $2,045 for Model LX. The current sales prices generate gross margins of roughly $1,800 for Model S and $2,100 for Model LX, but the analysis of profitability must consider whether these margins truly cover all costs, including allocated fixed overhead and whether the contribution margin from Model S shelves justifies continued production at current levels.

Analysis Objective and Approach

The primary goal is to develop a linear programming (LP) model to determine the optimal production levels of Model S and Model LX shelves to maximize profit or minimize losses, considering production constraints, capacity limits, and contribution margins. The LP model will incorporate constraints such as machine hours, assembly capacities, and demand limitations. Running Solver in Excel will identify the optimal production quantities, and sensitivity analysis will assess the robustness of these solutions.

Recommendations Based on Analysis

Based on the LP model outcomes, the recommendation will focus on whether Shelby should reduce, maintain, or even increase production of Model S shelves. If Model S shelves are indeed unprofitable at current levels, production should be scaled back unless the contribution margin is positive after fixed overhead absorption. Conversely, if contribution margins are positive and fixed costs are only partially covered, maintaining or increasing production might be justified to leverage existing capacity and contribution margin.

The decision should also consider strategic factors such as market share, customer satisfaction, and long-term capacity planning, beyond the purely quantitative analysis. The final recommendation will balance these considerations with the LP model's results, providing Shelby management with a clear, data-driven strategy for improving profitability.

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