Faced with the problem of variation of plant to plant overhead costs, declining profitability of the Detroit plant and increasing pressures on HED to perform well, Richard Sullivan, VP, Heavy Equipment Division (HED) of Wriston Manufacturing must decide on the course of action for the Detroit plant.
After the regression analysis and NPV calculations, it was found that the option of closing the Detroit plant and transferring the products to other plants showed a positive NPV as opposed to rebuilding new plant for the low volume products and retooling of the Detroit plant. Hence we recommend that Richard Sullivan close down the Detroit plant.
In addition to the above following recommendations could be made:
1. The Detroit plant cannot be compared to other plants on the basis of total over burden rate as a key profitability indicator. Products produced at Detroit require much more set-up time, as it has the largest number of product families as compared to other plants.
2. Capacity utilization could be a meaningful means of comparison for Detroit with other plants. Exhibit 2A shows a 70% utilization rate (ratio of sales to capacity). This indicates a profit potential at Detroit with effective sales and manufacturing strategies to utilize the unused capacity and convert this to additional profit.
Introduction and Problem Statement:
The VP, HED has two major concerns while deciding his action –
1. The complexity of the problem, due to the multi-plant manufacturing network of HED, where each plant has a specific mission to fulfill in the firm’s overall manufacturing strategy.
2. The examination of the cost drivers of a plant’s capabilities to manufacture products at low cost, such as wage rates, plant age, size or scale, and the breadth of the product line it manufactures.
In this report, we help the VP,HED, Richard Sullivan in his decision-making process, considering conditions within the plant and overall manufacturing...