Throughput Accounting and Optimization

Maltese Finders Inc is a company that has been engaging in the production of gold detectors. The management of the company adopts the utilization of the in-house cost of producing the detectors as their basis of assessing their productivity and consequently making a determination of decisions on whether to outsource the parts in the event it is cheaper that the in-house manufacture (Hilmola & Gupta, 2015).  According to the management, finding someone making them at $5 would be better for them than as they use $10 in their in-house manufacturing of the detectors. Their decision involved a development of a major policy that stipulated that they should outsource all the components that were cheaper to buy from the outside vendors.

Although the company managed to reduce their workforce as well as production capacity which should have increased their profitability by reducing the operation costs, their policy did not improve their profitability. The management assessed costs of the parts again to discover that the cost was lower and increased their outsourcing but did not improve their profitability, with the company incurring major losses in their profits. The company closed one of their plants, consequently increasing the hours of product and purchasing additional inventory to maintain their productions.

The company made the wrong decision by deciding to keep on outsourcing the parts they were cheaper than the alternative in-house production. The main issues were that although the company was not making additional sales of the parts they outsourced, they continued with the outsourcing policy. The resultant impact is that the company had a huge inventory that indicated a large profit (Li, Gu, & Liu, 2009). The company had a large inventory, but no one was buying it, they were continually spending to create the product, but although the ledger sheets indicate profits, there was no money to meet their expenses.

References

Hilmola, O., & Gupta, M. (2015). Throughput accounting and performance of a manufacturing company under stochastic demand and scrap rates. Expert Systems With Applications, 42(22), 8423-8431. doi:10.1016/j.eswa.2015.06.056

Li, X., Gu, X. J., & Liu, Z. G. (2009). A strategic performance measurement system for firms across supply and demand chains on the analogy of ecological succession. Ecological Economics, 68(12), 2918-2929. doi:10.1016/j.ecolecon.2009.06.018

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