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Group 2 - Case Study 5 - Plastech Answer
Group 2 - Case Study 5 - Plastech Answer
PLASTECH, INC.
Summary
PLASTECH, INC.
Plastech was a producer of plastic pellets for use as raw material in molded plastic products. It
was primarily a service firm. Its niche was that it has the specialized equipment and expertise for
blending a variety of ingredients.
It operated six machine-paced blending lines which had feeding hopper, blending machine, water
bath, and pelletizer. Others two lines had additional specialized equipment to properly handle
hazardous chemicals.
The orders were in small quantities because customers did not want to keep high inventory. Thus,
that necessitated relatively small production batch sizes and a large number of setups. In 1992, the
average batch size was 13,000 pounds and there were 320 setup. The average setup time was 24
hours.
In 1992, it lost 2 significant customers which comprised 46% total pounds of the plastic. Plastic
then devised a new marketing strategy seeking additional work from all of its existing customers
and broadening its product line.
To meet the challenges arose in 1993, a third shift was added to meet the increase in production
and setup volume.
Although the firm had increased revenue 20%, the profit were down 83% from fiscal 1992.
Smith, operation manager, wanted to find out the reasons for this.
Question 1: Which factors contributed to the decline in profits?
Answer:
The factors contributed to the decline in profits:
1. The expense of direct labor increasing
The expense of direct labor increased from 14.8% to 18.5%. The direct labor was resposible for
all production and setup. And it aligned with the addition of the third shift.
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In fiscal year 1992, 1993 we can see the details of some figures as follow:
The expense of direct labor in fiscal year
E(DL)1992 = 528,000/3,564,288 = 14.8%
E(DL)1993 = 792,000/4,283,288 = 18.5%
Another way to see the increasing of expense of direct labor in fiscal year is computing it on each
unit by devived with production.
E(DL)1992 = 528,000/4,193,280 = 0.126
E(DL)1993 = 792,000/5,069,173 = 0.156
2. The selling expenses increasing
The selling expenses increased from 22.9% to 27.9%.
In fiscal year 1992, 1993 we can see the details of some figures as follow:
The selling expenses in fiscal year
E(S)1992 = 819,786/3,564,288 = 22.9%
E(S)1993 = 1,199,366/4,283,288 = 27.9%
Or we can see the change by devived the selling expenses with production.
E(S)1992 = 819,786/4,193,280 = 0.195
E(S)1993 = 1,199,366/5,069,173 = 0.237
3. Average sales price dropping
Average sales price droped a little from 0.850 to 0.845. As a result, the net profit after taxes felt
the amount of $25, 346 in 1993.
Conclution:
The increasing in direct labor and selling costs and the decreasing in sale price are the reasons
explain for the decline in profits.
Question 2: What did Lincoln Smith find when he computed the direct and indirect labor
productivity figures?
Answer:
In fiscal year 1992, 1993 we can see the details of some figures as follow:
Ratio of productive time to total time in fiscal year
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QUESTION 3: Identify and describe the root cause of the decline in operating profits.
Recommend a plan of action for plastech.
Page 4 of 8
The amount of -2.96% shows the reason why the decline in operating profits.
2. Poor expense control
In 1992, the annual gross profit is 1,709,428$, after tax, the net profit is 189,991$. But, in 1993,
the net profit after tax is 31,482$ while the gross profit is increasing than last year 244,966 ( 13%)
The new net profit after tax in 1993 in down to -86%, it is a big fail figure. This is affected by all
expenses are increasing continuously.
-
Production cost increases by direct/indirect labor productivity increase. This increasing will
good for enterprise in case the total productive time is efficiency. But, parallel with the
increasing of productivity, the setup time is increasing while the productive time increases
insignificantly.
Sales expenses: Sales expenses increase about 32% while sales revenue is up to 17% only.
With such a low revenue, it can not compensate for any other expenses or related expenses
like labor cost, other expenses.
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Setup time: With 33% increasing in direct labor productivity, but the productive time
increasing amount is inefficiently, this thing explains why the setup time becomes bigger
and bigger. This proves for the reason why Plastech poor in controlling the expenses.
General & administrative expense: The 33% amount of increasing direct labor, the
expenses give for administration is bigger. We can see the detail of Exhibit 5 and 6.
No
1992
1993
%Dif
%value
Explainations
Gross profit
1,709,428.000
1,954,394.000
244,966.00
13%
Increasing
819,786.000
1,199,366.000
379,580.00
32%
Increasing
Selling expenses
General and administrative
expense
643,228.000
678,459.000
35,231.00
5%
Increasing
Total expense
1,463,014.000
1,877,825.000
414,811.00
22%
Increasing
Operation profit
246,414.000
76,569.000
(169,845.00)
-69%
Decreasing
56,423.000
45,087.000
(11,336.00)
-25%
Decreasing
189,991.000
31,482.000
(158,509.00)
-83%
Decreasing
Sales($)
3,564,288.000
4,283,451.000
719,163.00
17%
Increasing
10
Productions(ibs)
4,193,280.000
5,069,173.000
875,893.00
17%
Increasing
11
0.850
0.845
(0.01)
-1%
Decreasing
12
0.442
0.459
0.02
4%
Increasing
13
Average profit($/lb)
0.045
0.006
(0.04)
14
16,320.000
18,360.000
2,040.00
11%
Increasing
15
7,680.000
17,640.000
9,960.00
56%
Increasing
16
Total time
24,000.000
36,000.000
12,000.00
33%
Increasing
17
Productive/total ration
(0.17)
-33%
Decreasing
0.680
0.510
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