Statement of the Problem: Shelby Shelves is a small company that produces two different types of shelves namely S and LX for grocery stores. Though the company is making profits with its production mix of these two models which is (S = 400 & LX = 1400), the company is not able to meet the expenses of production costs of Product S from the revenue generated from Product S. The company is selling Product S at $1800 whereas the cost of producing each unit of Product S is $1839.
Executive Summary: Shelby Shelving case’s main aim is to maximize the profit of the company by arriving at a production mix for its two products which are LX and S. In the process the best possible use of the resources available needs to be achieved so as to reach the maximum possible profit for the company. The resources available for the production of both the products are three different kinds of machines which are Stamping, Forming and Assembling. While stamping and forming are commonly used for both the product types, assembling is done separately for the products owing to their varied needs of being assembled.
Due to the existing competition levels in the market, the company cannot even think of increasing its price for the product S. Therefore by making the optimum use of the resources available, an ideal product mix shall be reached at so as to maximize the profits of the company while not increasing the pricing of the two products.
Analysis: The constraints in this case are the limited machine hours that are available for production. The assembly department of product S has a monthly capacity of 1900 units and not more than that. Similarly, the monthly capacity of Stamping for product S is 0.3 hours per product; Forming is 0.25 hours per product. The assembly department of product LX has a monthly capacity of 1400 units and not more than that. Similarly, the monthly capacity of Stamping for product LX is 0.3 hours per product; Forming is 0.5 hours per product. Going by the maximum units that can be produced by the Assembly department of product S, if 1900 units of product S are manufactured, ideally 650 units of product LS need to be produced in order to maximize the profits to the company. Therefore in order to enhance the total profit of the company, the ideal production mix shall be 1,900 units of Model S and 650 units of Model LX. Consequently the profit per month would be calculated to be $268,250. Detailed calculations can be seen in the excel file attached.
While producing 1900 units of product S and 650 units of product LS, the ideal use of resources shall be as follows. For sampling 570 hours are used for product S and 475 hours for forming while the assembly department’s limit is already being produced i.e. 1900 units of product S beyond which the assembly department cannot afford to produce.
Also, per the calculations in the Excel file the variable profit per unit of product S which is at $260 per unit {($1000+$175+$365)-$1800} is greater than the variable profit per unit of product LX which is $245 per unit {($1200+$210+$445)-$2100}. Therefore it is very much evident that we can afford to increase the production of Product S while deriving maximum profitability rather than producing large volumes of product LX which generates less profits when compared to Product S.
In addition, as per the version of the controller, though the product S’s profitability is higher it is not able to add to the company’s profit volumes owing to it being unable to meet its overhead costs. When the production of Product S is raised to the maximum capacity of the assembly department which is 1900 units, the overhead costs are very effectively being absorbed by the Product S while contributing the maximum possible towards the profitability of the company.
