Pinnacle Desk Company

Pinnacle Desk Company (PDC), with a main plant in Anaheim, California and a smaller plant in Blythe, California is the process of planning its one-year plan for producing desks and chairs for the year. This long-term planning process takes into account sales over the past year, forecasts future sales and determines an initial planning schedule for management to use. It, of course, will be modified over the year as changes in demand, changes in prices and availability in materials, etc. warrant.

The main plant in Anaheim produces nine lines of desks and two lines each (aluminum and oak) of 2-drawer and 3-drawer filing cabinets. The smaller plant in Blythe produces only desks. Finished desks and file cabinets are sent to PDC’s distribution center in Riverside upon completion. The configurations and annual associated costs of the two plants are given below. Variable costs for materials used in making the desks and file cabinets (which should be included in the calculation of the profit coefficients) are also included. They vary slightly from Anaheim to Blythe due to local and transportation costs.

Anaheim Blythe

# of production line 1’s 1 1

# of production line 2’s 1 1

# of production line 3’s 1 1

# of workers 15 12

Fixed Costs:

Land/Building Lease/Taxes$313,245$211,110

Utilities/Building Expenses$ 76,675$ 52,370

Advertising/Miscellaneous$123,230$ 98,330

Labor (average) $39,200/worker $34,230/worker

Riverside (All Costs -- Land/Building Lease/Taxes,

Utilities/Building Expenses, Labor, etc.) $351,000

Variable Costs:

Aluminum (Per Sq. Ft.)$ 1.15$ 1.05

Particle Board (Per Sq. Ft.)$ 0.65$ 0.55

Oak Sheet Material (Per Sq. Ft.)$ 2.10$ 2.00

Transportation to Riverside

  • Per Desk$12.00$13.00
  • Per File Cabinet$ 3.00 -----

THE DESKS

The desks are manufactured in three sizes:

(1) 24” x 42” Student Desks

(2) 30” x 60” Standard Desks

(3) 36” x 72” Executive Desks

Each of the three sizes of desks comes in three lines:

(1) Economy

(2) Basic

(3) Special Hand-Crafted

THE PRODUCTION LINES

Production Line 1:Used for the manufacture of aluminum for the drawers and the frames for both the economy line desks and the aluminum file cabinets. Each production line 1 can operate 2000 hours per year.

Production Line 2: Used for the manufacture of the desktops for the economy line desks, which are made from particle board and are laminated to give the appearance of wood, for the desktops for basic desks which are made from oak sheets rather than particle board, and for the frames of the oak file cabinets. Each production line 2 can operate 2000 hours per year.

Production line 3:Used for the manufacture the wood drawers and the bases for both the basic and the handcrafted lines of desks and the drawers of the oak file cabinets. Each production line 3 can operate 2000 hours per year.

FINISHING:Once the parts for the economy and basic desks and the file cabinets have been manufactured, the desks are assembled and finished by craftsmen independent of any production line. Finishing time is scheduled as needed subject only to overall demands on total workers’ time.

HAND CRAFTINGHandcrafted desks have solid oak tops that are constructed by workers, also independent of any production line. They are assembled and finished by hand. Hand crafting time is scheduled as needed subject only to overall demands on total workers’ time.

LABOR

  • Each worker is contracted for 2000 hours per year; however, due to vacations, sick leaves, etc., each worker is expected to be available 90% of the time.
  • Each craftsman is capable of performing any of the tasks required to produce any model desk or file cabinet including, running the production lines, assembling or finishing the desk, or performing the detailed operations necessary for the handcrafted models.
  • Two craftsmen are required for each production line, but only a single craftsman is needed for assembly, finishing, or handcrafted operations. Thus the total number of man-minutes required to produce a desk or file cabinet is:

2(total production line time) + (assembly/finishing time) + (handcrafting time)

PROJECTED DEMAND/MATERIALS REQUIREMENTS/QUOTAS/GROSS PROFITS

  • The gross profits for each style/model of desk and file cabinet must be determined from the data in the spreadsheet. The gross profits take into account the projected selling price less the costs of any materials and transportation costs. It does not include the fixed costs detailed earlier, including labor. This true for both company locations.
  • There are different resource availabilities at each of the two production plants as detailed on the spreadsheet.
  • Demand for each product has been relatively flat over the past year (verify that) as detailed on the worksheet LAST YEAR. To project future demand for stationary models, the company uses exponential smoothing with a smoothing constant of α = .3. After estimating monthly demand in this manner, yearly demand can be projected by multiplying by 12.
  • To be able to assume that the unit profit will remain relatively stable throughout the year with the current selling prices, the company adheres to the following principles:
  • Total yearly production for each of the 9 styles of desks and 4 styles of file cabinets shall be between 70% and 115% of forecasted yearly demand.
  • The combined total production during the year of any line of desk (Economy, Basic or Handcrafted) or any size of desk (Student, Standard, Executive) must always between 20% and 40% of the total production of desks throughout the year.
  • 2-drawer file cabinets should not exceed 60% of total file cabinet production and 3-drawer file cabinets should not exceed 60% of total file cabinet production.

THE PDC SPREADSHEET

The spreadsheet PDC.xls spreadsheet has two worksheets.

  • The worksheet LAST YEAR gives the monthly demand for each of the 13 products for month of the last year.
  • The worksheet DATA gives the following for each line/size desk and file cabinet.

1) Selling per desk/file cabinet

2) Aluminum (Sq. Ft.) required per desk/file cabinet (including scrap)

3) Particle board (Sq. Ft.) required per desk/file cabinet (including scrap)

4) Oak sheet (Sq. Ft.) required per desk/file cabinet (including scrap)

5) Time required (Min.) per desk/file cabinet on each production line

6) Assembly/finishing time (Min.) required per desk

7) Handcrafting time (Min.) required per desk

The spreadsheet also gives for both plants:

1) Total availability of aluminum (Sq. Ft,)

2) Total availability of particle board (Sq. Ft.)

3) Total availability of pine sheets (Sq. Ft.)

THE OBJECTIVE

PDC’s objective, of course, is to maximize the projected company profit from making desks and file cabinets. To that end the operation is to be looked at as a whole. That means while there are separate constraints on materials and labor time for the two facilities, they are linked by the constraints requiring that the combined total production during any month of any line of desk (Economy, Basic or Handcrafted) or any size of desk (Student, Standard, Executive) must always between 20% and 40% of the total production of desks throughout the year. Thus there is a minimum of 22 variables plus any summation variables (9 for desk production in Anaheim, 9 for desk production Blythe, and the four file cabinets. Economy-Student-Anaheim desks and Economy-Student-Blythe desks are two separate variables.)

YOUR REPORT

Your report, at a minimum, should:

  • Recommend a yearly plan for production at both facilities at PDC. Take your annual recommendations and divide by 12 to give monthly recommendations. Point out which items may be “overproduced” and which “underproduced” and by what amounts based on annual projects.
  • Detail the amount of each resource, labor, and production line time used for each facility if your recommendation is adopted and compare to the limits available. Discuss the how much extra resources would be worth.
  • Give the actual percentages of each line/style of desk, (each will be between 20% and 40%) and for the file cabinets.
  • In the appendix, show that each product did exhibit stationary demand throughout the past year and show how you got your annual forecasts.
  • Try to explain why the results turned out the way they did.

Discuss some appropriate “what-if” analyses including:

  • The viability of instituting a bonus plan costing about $125,000 per year that would increase labor availability to 48.5 weeks per year per worker.
  • The possibility of adding additional workers at each facility.
  • Other “what-if” you feel might be reasonable to evaluate.
  • For EXTRA CREDIT -- also discuss the merging of the two facilities as detailed on the next page. This can improve your letter grade by up to 8 points (see grading at end) which in effect is 2/3 of a letter – B+ becomes A, B becomes A-, B- becomes B+, etc. It depends how detailed, correct, and analytical your presentation is on this subject.

POSSIBILITY OF MERGING THE PLANTS

Evaluate this in as much detail as above.

Evaluate the possibility that the two facilities merge to a new, larger plant would be located about a block away from the Riverside distribution center. The larger plant would have:

  • 25 workers at a salary equal to that of Anaheim
  • 1 production line 1, 1 production line 2, and 2 production lines 3. Note: Since there are 2 production line 3’s they now have 4000 hours of production time for production line 3.
  • The combined annual resources of aluminum, particle board, and oak sheets at a price equal to the average price between the two current facilities

It would:

  • Still maintain the percent quotas for each style/size of desk and file cabinet
  • Still meet 70% to 115% of the total projected demand
  • Selling prices are to remain the same
  • Transportation costs to the distribution center would be reduced to a flat $50,000 per year for all products combined
  • Fixed costs for the new plant would be:

Fixed Costs:

Land/Building Lease/Taxes$421,160

Utilities/Building Expenses$102,300

Advertising/Miscellaneous$154,330

Now obviously there would expenses involved in combining the plants. If these expenses are to be recouped over a 3-year period, then discuss the maximum amount the moving expenses could be to justify the move. (Note this is simply saying the following: Assume PDC will make the same amount per year over 3 years under merging or not merging – Look at the difference in the net profits over that time.)

TEAMS

You are to work in groups of 2 to 4 people. This is a class project! Do a quality job. Your report should have appropriate charts, graphs, and tables. GOOD LUCK!!

GRADING

Grading is subjective on my part. I grade spelling, English, grammar, organization, results, analysis, and presentation. Grading: A+ = 98 (only 1 ever given), A = 93 (rare, but can be done), A- = 88, B+ = 84, B = 80, B- = 76, C+ = 72, C = 68, C- = 64, D+ = 60, D = 56, D- = 52; F = 35.