Lehigh Steel Case Study
Lehigh Steel: The Case for Activity Based Costing and The Theory of Constraints
Introduction:
Lehigh Steel is a steel and alloy production company with a huge range of products. It was able to reach a record profit in 1988, but went down to a record loss by 1991. Lehigh is owned by a parent company, The Palmer Company who’s a global manufacturer of alloy and steel and were interested in Lehigh’s specialised equipment to allow them to gain a competitive advantage.
Palmer had acquired Lehigh in 1975 not for synergies with its own speciality steels businesses, but for the Continuous Rolling Mill (CRM). CRM is specialized equipment that can convert steel intermediate shapes to wire for Palmer’s Bearing rollers. There are only 6 mills in the US.
The specialty steel industry composes 10% of the US steel industry. The quality of steel products is determined by the product application and the grade of the steel. Since the steel market is in a very competitive sector, firms must maintain a high standard of quality and keep its costs to its minimum. For non-profitable products to exit the market, the manufacturers can do this silently by raising their price above the competitive price so there’ll be no customers remaining and allow the manufacturer to stop making these products.
Lehigh Steel has a huge range of products but 3 of these products comprise 70% of Lehigh’s total sales, these three products are: Alloy, Die Steel and High Speed. In order to analyses each of these products, we will need to do some costs analysis to find out whether these products are profitable or whether these products are the causes for the loss in Lehigh Steel. To do this, we will focus mainly on ABC and TOC analysis to analyse the cost and therefore different profits due to the different methods of cost allocation, for each product using the two different methods, then compare the results arising from the two analyses, and finally draw a conclusion.
The main aim of this report
Introduction:
Lehigh Steel is a steel and alloy production company with a huge range of products. It was able to reach a record profit in 1988, but went down to a record loss by 1991. Lehigh is owned by a parent company, The Palmer Company who’s a global manufacturer of alloy and steel and were interested in Lehigh’s specialised equipment to allow them to gain a competitive advantage.
Palmer had acquired Lehigh in 1975 not for synergies with its own speciality steels businesses, but for the Continuous Rolling Mill (CRM). CRM is specialized equipment that can convert steel intermediate shapes to wire for Palmer’s Bearing rollers. There are only 6 mills in the US.
The specialty steel industry composes 10% of the US steel industry. The quality of steel products is determined by the product application and the grade of the steel. Since the steel market is in a very competitive sector, firms must maintain a high standard of quality and keep its costs to its minimum. For non-profitable products to exit the market, the manufacturers can do this silently by raising their price above the competitive price so there’ll be no customers remaining and allow the manufacturer to stop making these products.
Lehigh Steel has a huge range of products but 3 of these products comprise 70% of Lehigh’s total sales, these three products are: Alloy, Die Steel and High Speed. In order to analyses each of these products, we will need to do some costs analysis to find out whether these products are profitable or whether these products are the causes for the loss in Lehigh Steel. To do this, we will focus mainly on ABC and TOC analysis to analyse the cost and therefore different profits due to the different methods of cost allocation, for each product using the two different methods, then compare the results arising from the two analyses, and finally draw a conclusion.
The main aim of this report