Five Star Tools

Executive Summary

This case study provides an analysis and evaluation of the current profitability of Five Star Tools. Methods of analysis include analysis of product profitability and incremental analysis. All calculations can be found in the appendices. Results of the data analyzed show that production constraints exist in the coating and sharpening department affecting Five Star Tools profitability. This case study finds that the addition of an inspection station before the coating and sharpening department will resolve the current issues faced by Five Star Tools.

Introduction

Five Star Tools is a small family-owned manufacturing company producing diamond-coated cutting tools used by jewelers. The manufacturing process currently involves three processes of cutting steel banks, running the blanks through a steel bath, coating and sharpening and then finally inspected. Due to growing pains over the years Five Star Tools is faced with a situation where the company fears that it will soon earn a reputation of being an unreliable supplier due to the fact that they might not be able to meet customer order deadlines. Five Star tools has identified a constraint in its coating and sharpening department leading to missed deadlines on important customer orders.

Issues Address

Five Star Tools has a constraint in its coating and sharpening process leading to missed deadlines on several important customer orders. Of immediate concern to the company are to:

1. Identify exceptionally profitable products.

2. Decide whether to concentrate on profitable products only and drop the less profitable ones.

3. Figure out a way to run more product through the coating process (loosen the constraint).

Management understands that some of their products are more profitable than others and the first concern lies with identifying these products versus the less profitable products and make a decision as to which of their product lines should be emphasized in the manufacturing process. Additionally, having identified the manufacturing constraint as the coating and sharpening process, Five Star Tools must figure out a way to run more of its product through the coating process, thus eliminating the identified bottleneck.

Product Profitability Analysis

Product profitability analysis has indicated that Five Star Tools most profitable product is the Model C210 Chisel. If the company plans to eliminate less profitable product, they should put emphasis on the Model C210 because it generates a higher contribution margin per unit. As indicated in Table 1, although model C210 has a smaller per unit contribution margin of $250, only .2 hours of worker time is spent in the coating and