Lehigh Steel Assignment 2012 1.

Compute profits for the five sample products under ABC and Theory of Constraints (TOC). The profit that we should attend to according to TOC is throughput = revenue minus materials costs. For ABC, first use the current production volume and number of orders and SKUs from Exhibit 4 to calculate total ABC profits for each product. Then calculate per-unit (=per-pound) profit by dividing total by # of pounds. TOC throughput (= can be calculated entirely on a per-pound basis. Check figures: for Alloy: Condition Round, ABC profit per pound should be about ($0.11), and throughput per pound should be $1.77. 2. Explain briefly, in a way that would be helpful to a non-accountant, why profits are different under each of these methods and the standard-cost method shown in Exhibit 5 of the case. 3. Should Lehigh base its product mix decision on the ABC profits or throughput (TOC) or neither? Is there some (at least approximate) way of incorporating the insights of both ABC and TOC into this decision? 4. Lehigh has only started to think more seriously about product costs since the recession ended. Does this make sense, or would they have made different and betterproductmix decisions during the recession if they had already been using whatever profit estimation method you suggest in your answer to question 3?