Shelby Shelving is small company in the manufacturing industry that produces shelves. The shelves manufactured are in two models: model S and model LX. Model S is a standard model whereas model LX is a heavy duty model. Bothe models are produced in three major processes: the stamping, forming and assembly process. Bothe stamping and forming processes are done by machines and so the company incurs overheads costs which it accounts for using unit cost accounting principles.
Of late, the company management has noted that the profitability of the whole company is being affected by the production of model S. this problem was identified that the unit cost of producing one unit of model S is $1839 whereas the unit selling price is $1800. This problem posed a failure to the company’s profitability. In a bid to identify and solve problem the production engineer said that the company should reduce the units of model S produced. On the contrary, the controller says reducing the production would put the company in a worse off position considering the competition in the market. He further added that the problem rose as a result of costs incurred through overheads than is required. This paper will recommend a solution to the company in order to improve its profitability.
The idea that the company should reduce the number of units of model S produced does not offer a solution to the problem. This because the company produces lesser units thus less revenue, looses part of the market share to the competition and yet the unit cost is still higher than the selling price. The investigation reveals that the company can reduce the overheads by reducing the number of hours in the stamping and forming processes. This reduces the cost of production and so the unit cost gets lower than the selling price thus the company earns profits from the sale. This improves the profitability problem the company is currently experiencing.
In this analysis, it is noteworthy that the solution offered by the production engineer is also viable but we have to consider that this would reduce the market share the company occupies in the market. Secondly, the solution offered by the controller that the overheads in the production are more than required will have to be analyzed as well.
Reducing the number of units of model S produced say by 20% would mean that the company would produce 80 units less and this therefore reduces the market share it occupies by 22.5%. This however does not improve the profitability since it only reduces the revenue by $3120. This therefore does not offer a very effective solution to the profitability problem.
The controllers’ proposition demands an investigation to the problem by analyzing the overhead used in producing one unit of model S. this will be especially in the coat of machine hours consumed in the stamping and forming processes considering this is a standard model and not a heavy duty model such as model LX.