Instructions:

Read the

Unit 2 Chandler Corp case study

attached below

Answer the following question:

• Based on your preliminary review of the case study, which method should Chandler use? Support your post with information from the case study.

Please be sure to validate your opinions and ideas with intext citations and references in APA format.

Adaptedfrom IMA

IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 3, ART. 1, SEPTEMBER 2018

ISSN 1940-204X

Chandler Corp: Choosing the Right Costing Method to Evaluate New Products

Paulette A. Ratliff-Miller
Associate Professor
Grand Valley State University

INTRODUCTION

Over many years, Chandler Corporation has become a profitable business by making
awnings, pavilions, and other types of shade shelters. Most of the customers are
municipalities looking for shelters for state parks or school districts that want covered
walkways for students. Every job is custom, because each customer has different
needs, and each location has different features. Chandler makes products when it
receives an order; it does not produce products for inventory. While a customer might
order multiple units for its site, the durability of the products means that the customer
will not have to reorder replacements for decades.

So, when Ned Beale, the vice president of Sales and Marketing at Chandler, received
a call from a swimming pool retailer in Florida that wanted a continuous supply of
identical shelters, he was excited about the potential sales but a bit unsure as to
whether Chandler could handle the order. The previous week he had gotten a similar
call from a landscaping company inquiring about lattice-covered trellises the company
wanted to incorporate into its landscape designs. He immediately texted Dan Smith, the
CFO of Chandler, requesting a meeting to discuss whether to accept the new orders.

COMPANY BACKGROUND

Chandler Corporation, located in Chandler, Arizona, has been in the business of
manufacturing fixed outdoor shade shelters for more than 30 years. Its customers are
often public agencies (for example, city planners, schools, public parks, and so on), but
they sometimes are landscape architects and designers who are developing outdoor
areas for private customers (such as businesses, daycare centers, homes, and so on).
The products are produced in a wide variety of configurations, including amphitheaters,
pavilions, gazebos, trellises, transit shelters, walkway covers, dugout/bleacher covers,
and fabric shade structures. These are all engineered to the customer’s specification
and are quick to install, which minimizes building time and disruption. Chandler provides
a complete turnkey service from concept to completion with custom products for each
site. The primary value driver is a quality design that can be easily installed on site.

PRODUCTS
Chandler specializes in shelters with tubular metal frames. Because of state and local
building codes and site-specific constraints, Chandler’s products are custom engineered
and made for each location. A typical structure includes a steel frame, roofing, and other
decorative and functional options. The frame consists of columns and supports for the
roof, which can be painted in any color. Columns vary from simple designs, which use
uprights consisting of one rectangular tube with flat plate anchors, to complex designs,
which are created for visual appeal. Complex support structures can use multiple tubes
for each support for aesthetics or strength. Customers might also choose a frame style,
which can be connected to a stonework pedestal to achieve a more natural look.

The roofs on Chandler’s shelters are typically made from metal sheets. Some
products, such as trellises, have metal top panels with various cutout designs, which
allow some light to shine through. Other products are designed to have fabric tops or
sides attached. Working with designers and engineers, customers can customize their
orders with optional accessories such as insulated ceilings, electrical outlet cutouts,
gutters, solar panels, windscreens, integrated seating, ornamental railings, overhead
gables, and cupolas.

SALES AND INSTALLATION
Chandler’s products are distinctive and well-made, so it is not unusual for customers to
seek out the company. Chandler does not perform any sort of market analysis and has
no sales staff; instead it operates through independent representatives located
throughout the country, who receive a percentage of the selling price as commission.
These sales representatives work with a variety of manufacturers to provide all the
products necessary for park and playground development. They also assist customers
in finding independent, Chandler-trained installers to complete their construction on site.

PRODUCTION PROCESS

SALES ORDERS
The process starts when a customer who needs a shade shelter of some sort contacts a
local sales representative. After discussing the customer’s needs, the sales
representative submits a preliminary design, referred to in the industry as a “napkin
sketch,” to Chandler whose engineers review it to determine whether the project can be
manufactured in its facilities. The primary constraints are tube steel length limitations,
which affect the size of the structure and affordability for the customer. If the project is
feasible, then a contract price and conditions are established, and the customer decides
whether the price is acceptable. Some contracts specify only one product, such as one
amphitheater. Other contracts can be for multiple units, such as 50 roadside picnic table
shelters. Some products are complex with many different parts, whereas other products
have only a few parts.

PRODUCT DESIGN AND ENGINEERING
Once the contract is finalized, Chandler’s drafting team will create more formal drawings
of the shelter, including the lengths, angles, curves, slopes, and so on. Chandler
engineers then examine the designs and determine the proper materials to be used in

manufacturing. Because building codes vary considerably by location, designs must
take into account not only global minimum building standards (International Building
Code, IBC) but also local environmental conditions and regulations. For example, the
California Division of State Architects (DSA) requires additional structural safeguards
against earthquakes. A structure must be able to flex without breaking. The Florida
Building Commission requires additional structure safeguards against hurricane-force
winds. There the structure must be very rigid to withstand prolonged exposure to high
winds. Thus, a basic steel square shade covering installed in California would be
designed differently than a structure installed in Florida.
With custom design jobs, engineering time can be a limiting factor in the process. There
are six engineers who work full time. Because of quality issues, these employees
cannot practically work more than 50 to 55 hours a week. Adjusting engineering
capacity is challenging because finding capable engineers is difficult, and it takes six
months for an engineer to be fully functional for the company. Because engineers are
costly, excess capacity in engineering is undesirable. Yet, without sufficient engineering
hours available, delivery time can be extended for some projects. Unlike engineers,
designers are more easily trained and readily available in the workforce. Chandler
currently employs 10 designers who work 40 hours a week.

SCHEDULING, SETUP, AND FABRICATION
Scheduling is a critical function in Chandler’s production process. In order for jobs to be
completed in a timely fashion, materials or components must be scheduled to arrive or
be finished and moved from one process just as they are needed in the next process.
Chandler has found that scheduling costs rise in direct relation to the number of jobs
started, as each requires the machines to be set up differently to handle the different
components.

• Schedule production. Production is scheduled to meet the time constraints of the
factory and the availability of the installer. Because the shelters are usually part of a
larger project, the delivery of the shelter must be coordinated with the completion of the
foundation. Installers do not want the product to sit at the site too long before it is
installed, nor do they want to wait too long for the product.

• Schedule labor. Most manufacturing laborers are paid hourly and are cross-trained to
work in different parts of the factory. There is currently sufficient capacity in the
manufacturing facility to meet the production needs.

• Materials. Material orders must be scheduled to arrive as they are needed. Chandler
does not have room at its facility to warehouse extra material. The primary material
input is steel, which is usually ordered specifically for each job. The steel frame uses a
variety of sizes and shapes of steel tubes. Most tubes are cut to the desired length in
the factory. Some excessively wide tubes are ordered pre-cut. Other steel materials,
such as plates and roofing, come in sheets and are cut to the desired length. Once
delivered to the shop floor, materials are moved via overhead cranes and conveyer
belts to the next process.

• Cut and drill steel. Given precise engineering designs, the workers carefully cut the
steel tubes and sheets to the desired length and size. Some steel pieces will also have

holes drilled into them for assembly on site and attachment to the foundation. There can
be many parts and cuts for each product, and each must be cut perfectly the first time to
avoid waste of critical material. When customers order multiple units of the same kind,
the same cuts can be made multiple times, reducing the cutting and drilling machine
setups needed.

• Weld parts. Some parts are welded together—for example, plates are welded onto
the ends of support columns, which are used to anchor the tube to the foundation. The
company uses an internal bolting system, and thus, nuts or bolts are frequently welded
to the frame. Once the sections of steel are cut, drilled, and welded, they are sand
blasted to make the metal smooth and ready for painting.

POWDER COATING
Powder coating is a painting process that applies a free-flowing, dry powder to metal
surfaces, which does not require a solvent to keep the binder and filler parts in a liquid
suspension form. The coating is applied electrostatically and is then cured under heat to
allow it to flow and to create a “skin” over the metal surface. Because powder coating
does not have a liquid carrier, it can thickly and evenly coat both horizontal and vertical
surfaces. Multiple colors can be applied before curing to achieve the desired color and
texture. Paint colors are easily changed with little cost. Chandler currently has excess
capacity in the powder coating process, but adding additional capacity to this process is
very costly. It also uses a great deal of space on the shop floor. The length of any of
Chandler’s products is limited to 60-foot-long steel sections, as this is the maximum size
the powder coating equipment can accommodate.

SHIPPING AND INSTALLATION
Once the product parts are finished, they are packed for shipping. This requires some
buffering and wrapping parts to protect the shape and finish. Products are generally
shipped within a day or two of completion. Shipments occur on flat-bed trucks.
Products are installed on site by independent installers. Problems with installation can
occur if the site was not properly prepared or described in the design process. Likewise,
if the installer damages a part in the installation process, a new one must be
manufactured. Chandler provides support for installation problems and guarantees its
products. Shipping and installation costs are directly charged to the customer, so they
are not included in Chandler’s quoted prices.

COMPANY COSTS

Chandler utilizes a normal costing system—that is, each job is charged with its actual
direct materials cost, and overhead is allocated to jobs based on cost drivers. Total
overhead costs, drivers, and capacities can be found in Exhibit 1. Other costing
information includes:

• Direct material is assigned to products at actual cost.
• Labor cannot be traced directly to individual jobs but is included in the cost of
activities (such as design, engineering, fabrication, powder coating,
scheduling/setup, and general factory).
• Design/drafting costs are assigned to jobs based on design hours.

• Engineering costs are assigned to jobs based on engineering hours.
• Scheduling costs include all setup costs. These are assigned to jobs based on
the number of jobs being set up.
• Fabrication costs are assigned to jobs based on the number of parts.
• Powder coating costs are assigned to jobs based on square footage of the
material.
• General factory costs include supervision, utilities, taxes, factory depreciation,
and other factory costs. Chandler assigns general factory costs based on
machine hours.
• Transportation costs are free on board (FOB) Chandler’s facility. The customer
is responsible for the shipping costs, which are paid directly to the trucking firm.

THE MEETING

Ned Beale: Dan, I got a call from a company in Florida that wants to sell one of our
products at his swimming pool business as a pool shade. The interesting thing is, he
wants 8 to 10 per month, indefinitely. This is a bit different from our usual order in that
we would not have to go through the design and drafting or the engineering each time
we get an order. Also, several units could be shipped out at one time, reducing shipping
costs for the customer. There may be other economies of scale as well.

Dan Smith: You are right about the savings on drafting and engineering, but we need to
consider our capacities. The additional business would put pressure on our workforce
and processes, especially the powder coating system. As for the labor, we might be
able to manage with overtime, or we may have to add another shift. Our current custom
jobs are very profitable, and I do not want to make those wait while we produce multiple
shades for this new customer.

Ned: While we are on the topic, last week I got a call from a landscaper who had a
similar request for trellises. There are some savings we might discover by accepting
these ongoing orders. Quoting prices, which we base on location, materials, square
footage, and number of parts, would only have to be done once. Scheduling and setups
could also be reduced if we produce in batches.

Dan: Do not commit to anything yet but get an estimate of the resource usage and cost
for each project, and I will take a look at them.

NEW OPPORTUNITIES

REQUEST FOR POOL SHADES IN FLORIDA
While on vacation, Mel Stutzman, manager of Luxury Pools in Ocala, Florida, noticed a
shelter at a rest area along I-35 in Oklahoma. He thought this product would be a
perfect complement to his pool business. Customers often asked about shade and
shelter products for their pools and patio furniture. He found out this shelter was
manufactured by Chandler Corporation and called the company as soon as he returned
to inquire about ordering 120 of them for the coming year.

Initially Chandler would need to determine the adjustments to the structure to meet
Florida’s requirements due to hurricane-force winds and make minor design changes to
accommodate the pools. Each subsequent structure would be identical. Details relating
to materials and other resources needed for making the pool shades are in Exhibit 2.

REQUEST FOR LANDSCAPING TRELLISES

Jaime Potter saw one of Chandler’s lattice-covered trellises and immediately knew this
would be perfect for several of her clients. The lattice tops allow some sun to get
through but provide enough shade to protect delicate plants from the full effect of the
sun. Since the tops can be fabricated in many designs, she would not have to worry
about having her designs all look alike. She placed a call to Chandler’s production
facility and is really hoping it will accept her order for 60 trellises in the next year. Details
relating to materials and other resources needed for making the trellises are in Exhibit
2.

ASSIGNMENT REQUIREMENTS:

1. Quantitative Analysis:
Chandler Corporation is currently producing several products, including both
custom and standard designs. It has received requests for two new products:
swimming pool shades and landscape trellises. It is considering whether to
produce either or both of these products. Based on the projections in Exhibits 1
to 3 describing the current capacity and required capacity needs for the new
products, complete the following requirements:

a. Using ABC, compute the Predetermined Overhead Rate for each
activity.

b. Compute the cost of unused capacity for each activity and in total.

c. Compute the TOTAL and UNIT cost of making the full demand of pool
shades assuming that Chandler bases its rates on the predetermined
overhead rate.

d. Compute the TOTAL and UNIT cost of making the full demand of trellis
assuming that Chandler bases its rates on the predetermined
overhead rate.

e. Compute the TOTAL and UNIT cost of making the full demand of pool
shades assuming that Chandler bases its rates on EXPECTED
capacity (used capacity plus required capacity for the full demand of
pool shades).

f. Compute the total and unit cost of making the full demand of trellises
assuming that Chandler bases its rates on EXPECTED capacity (used
capacity plus required capacity for the full demand of trellises).

2. Qualitative Analysis: In a 2-3 page report, based on your quantitative analysis,

discuss the results of what your quantitative analysis means for Chandler. When
considering a decision to make the new products, would costs computed using
practical capacity (c and d) or expected capacity (e and f) as the denominator
provide better information to Chandler’s management? Explain your answer.
Support your recommendation with a minimum of 3 academic resources.