Bridgeton final

Document Sample
Bridgeton final Powered By Docstoc
					  Course: 45-701

  Submitted to:
Prof. Zhaoyang Gu

  Submitted by:
    Neha Arya
   Marc Brands
  Anil Konjalwar
  Alok Satyawadi
Competitive Environment

The ACF plant has experienced serious cutbacks throughout the 80s due to competitive

pressure caused primarily by the entrance of foreign competition in a market formerly

dominated by US auto manufacturers and the oil shock of the 70s. The expensive

gasoline has started a trend in the auto industry for fuel efficiency resulting in ever

increasing emission standards.

With the resulting loss of domestic market share, ACF is facing intense competition from

not only other suppliers but other Bridgeton plants as well. The task of remaining cost

competitive is daunting as outsourcing seems to be catching on as a way to cut costs.

Overhead Burden Rate

We have used direct labor as the allocation base to calculate the figures given below.

However machine hours may be a better allocation base as the plants are highly

mechanized.

     From Budgets                       1988                      1989          1990
 [Total Overhead/Direct            109,890/25,294              78157/13537   79393/14102
      Labor] x 100
          Rate                           434%                      577%         563%

Gross Margin %
 Product 1                1988         1989
 Price                $    62.00   $    62.00
 Material Cost        $    16.00   $    16.00
 Labor Cost           $     6.00   $     6.00
 Overhead Cost        $    26.04   $    34.62
 Profit               $    13.96   $     5.38
 Gross Margin               23%            9%
 Product 2
 Price                $    54.00   $    54.00
 Material Cost        $    27.00   $    27.00
 Labor Cost           $     3.00   $    3.00
 Overhead Cost        $    13.02   $    17.31
 Profit               $    10.98   $     6.69
 Gross Margin               20%          12%
Note: The overhead rate for ’88 and ’89 is 434% and 577% respectively
This exercise illustrates how profitability is related to the overhead allocation rate and

what a big impact overhead allocation can make towards the profitability of a product

even when the total overhead has fallen dramatically (because of the outsourcing of

muffler/exhaust and oil pans). The gross margin fell significantly for both products when

the overhead rate used was increased from 434% to 577% due to product eliminations.

Fixed Costs

Fixed costs are defined as costs that do not change with the level of business activity. By

this we mean those costs that still have to be incurred regardless of whether 1000 or

10000 manifolds are produced. This does not mean those costs that will continue to be

incurred if we shut down production for manifolds and outsource.

This is an important distinction for our classification given below:

1500, 5000, 8000, 9000, 11000, 14000
Note: All costs are variable in the long run


Avoidable Costs

We have taken avoidable costs to mean those costs that can be avoided if a certain action

is undertaken. In our case that action is the outsourcing of Manifolds.

Except for 8000 and 11000 all other costs are avoidable to an extent because they are

related to a certain minimum level of the production activity. (Even 8000 is avoidable

given a sufficient period of time or sale of equipment. As for 11000, it includes

components like engineer salary and rearrangement costs that are avoidable)

Direct labor and direct material for manifolds is avoided (also the associated 12000)

2000- cost production supplies for manifolds is avoided

3000- cost of wearing tools used for manifolds is avoided

4000- cost of utilities used for manifold production are avoided
9000- constant personnel related expenses where personnel are fired if Manifolds is

outsourced.

1500, 1000, 5000, 14000 – cost of personnel that will be fired if action taken is avoided

Note: A look at Exhibit 2 showed a fall in all overhead accounts after the outsourcing in 1989. We can take this to

mean that in reality no costs are completely avoidable or unavoidable.

To Outsource or not to Outsource

We are not in favor of outsourcing manifolds because of the following reasons:

     1. The outsourcing of Muffler/Exhaust and Oil Pans, increased the OVH rate from

          434% to 577% even though the total overhead amount fell. This new rate when

          applied to Manifolds made it cost inefficient despite some remarkable

          improvements in its production. This was because the fixed costs associated with

          the production of Muffler/Exhaust and Oil Pans were transferred to the remaining

          product lines.

     2. It is quite likely that if Manifolds are outsourced then the costs associated with

          their production will be added on to the remaining two lines. Their cost

          classification will suffer and they could be next in line for a possible outsourcing.

          The plant may eventually shut down and so may the company in time.

     3. Though the data is absent we feel that the allocation base should be machine

          hours instead of direct labor. This base should give a more accurate picture given

          the extensive mechanization of the plant and may provide some respite to the

          Manifolds operation in term of overhead cost allocation.

     4. We have attempted a quantitive analysis of the effect of an outsourcing on the

          remaining lines. The results are given in the appendix. These were arrived at

          using a simple forecasting technique. The results are only meant to be illustrative
and not accurate. We want to show how adversely the remaining lines could be

effected if Manifolds is outsourced.



                                       ****
                                                       APPENDIX
                                                                                                      Projection
                                                                                                  with          w/o




                                       Total
                                       % of
                                                                                                Manifolds    Manifolds
                            1987                   1988             1989            1990         1991          1991
Sales
   Fuel Tanks           $    70,278     21%    $     75,196     $    79,816     $    83,535     $   87,223    $ 87,223
   Manifolds            $    79,459     24%    $     84,776     $    89,323     $    93,120     $   96,888    $      -
   Doors                $    41,845     13%    $     45,174     $    47,199     $    49,887     $   52,128    $ 52,128
   Muffler/Exhausts $        62,986     19%    $     66,266     $        -      $        -      $        -    $      -
   Oil Pans             $    75,586     23%    $     79,658     $        -      $        -      $        -    $      -
   Total                $ 330,154              $    351,071     $   216,338     $   226,542     $   236,239   $ 139,351
Direct Material
   Fuel Tanks           $    15,125     12%    $     15,756     $    16,312     $    16,996     $   17,499    $   17,499
   Manifolds            $    31,696     26%    $     33,016     $    34,392     $    35,725     $   36,810
   Doors                $    14,886     12%    $     15,506     $    16,252     $    16,825     $   17,348    $   17,348
   Muffler/Exhausts $        28,440     23%    $     29,525     $        -      $        -      $       -     $       -
   Oil Pans             $    32,218     26%    $     33,560     $        -      $        -      $       -     $       -
   Total                $ 122,365              $    127,363     $    66,956     $    69,546     $   71,657    $   34,847
Direct Labor
   Fuel Tanks           $      4,169    17%    $      4,238     $     4,415     $     4,599        4,713      $    4,713
   Manifolds            $      5,886    24%    $      6,027     $     6,278     $     6,540     $ 6,715       $       -
   Doors                $      2,621    11%    $      2,731     $     2,844     $     2,963     $ 3,055       $    3,055
   Muffler/Exhausts $          5,635    23%    $      5,766     $        -      $        -      $     -       $       -
   Oil Pans             $      6,371    26%    $      6,532     $        -      $        -      $     -       $       -
   Total                $    24,682            $     25,294     $    13,537     $    14,102     $ 14,483      $    7,769
Overhead Rate           $      4.37            $      4.34      $     5.77      $     5.63      $   5.44      $    11.94
Overhead
               1000 $          7,713           $      7,806     $     5,572     $     5,679     $    5,626    $    6,616
               1500 $          6,743           $      6,824     $     5,883     $     5,928     $    5,906    $    6,313
               2000 $          3,642           $      3,794     $     2,031     $     2,115     $    2,073    $    2,837
               3000 $          2,428           $      2,529     $     1,354     $     1,410     $    1,382    $    1,891
               4000 $          8,817           $      8,888     $     7,360     $     7,433     $    7,397    $    8,073
               5000 $        24,181            $     24,460     $    20,063     $    20,274     $   20,169    $   22,096
               8000 $          5,964           $      5,946     $     3,744     $     3,744     $    3,744    $    4,771
               9000 $          6,708           $      6,771     $     5,948     $     5,987     $    5,968    $    6,326
              11000 $          5,089           $      5,011     $     3,150     $     3,030     $    3,090    $    4,000
              12000 $        26,936            $     28,077     $    15,027     $    15,683     $   15,355    $   20,997
              14000 $          9,733           $      9,784     $     8,025     $     8,110     $    8,068    $    8,853
   Total                $ 107,954              $    109,890     $    78,157     $    79,393     $   78,775    $   92,774
Profit                  $    75,153            $     88,524     $    57,688     $    63,501     $   71,324    $    3,962
Profit Margin                    23%                    25%             27%             28%            30%            3%
Methods for calculation Projections

-   For determining Direct Sales, Material and Labor, we calculated the average annual growth rate for each category
    using 1990 and 1987 date and projected the 1991 figures using the 1990 values times the calculated growth rate.
    For determining the overhead costs we separated the fixed and variable component using the decrease of overhead as
-   function of the decrease in direct labor after removing Muffler/Exhausts and Oil Pans from production. Using these
    values we prorated the overhead cost with and without Manifolds.
-   We ignored inflation in the overhead cost from 1990 to 1991

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:21
posted:11/25/2011
language:English
pages:7