Lehigh Steel Case Solution

Case Solution

Lehigh Steel can be a niche steel manufacturer that dropped from record profits to record deficits within three years, driven by an failure to distinguish between lucrative and unprofitable business. The dimensions and growth and development of service activities and expenses inside an progressively personalized items signifies that activity-based costing (ABC) could unlock the methods of profitability. However, the top fixed-cost structure signifies that theory of constraints (TOC) might be relevant. Lehigh must learn how to determine profitability to rationalize its products.

Excel Calculations

Activity Based Costing

TOC Costing

Standard Costing

Alloy: Condition Round, Coversion: Roller Wire, Die Steel: Chipper Knife, Die Steel: Round Bar, High Speed: Machine Coil

Questions Covered

1. Using the information in Exhibit 4, 5 and 6, do a revised operating profit work up (like Exhibit 5) on an ABC Basis.

2. Based on the current production levels, costs and revenues determine the priorities of the five products (or processes) should have for allocating CRM capacity, using the following cost concepts; Full standard cost, Full ABC cost, Extreme TOC cost and any other cost concepts that you believe are appropriate.

3. Calculate the apparent change in profits Lehigh would experience by shifting production capacity from lowest to the highest priority product for each of the above.

4. Explain why the method of setting one set of priorities is superior to the others.

5. If Lehigh uses your methodology to allocate production priorities, what will you expect to happen, besides an increase in profits?

6. Are there any apparent limitations to the above methodology for allocating scarce capacity?