Manufacturing and Costs Essay Sample
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Manufacturing and Costs Essay Sample
ACF, an automotive supplier, was doing well as a company until foreign competition began to hurt its cash flow. ACF primarily caters to the domestic auto market and therefore experienced a hit to its production contracts post 1985 when the domestic automakers lost marketshare resulting in a shrinking cost inflow for ACF. This caused ACF to analyze the current cost structure of ACF’s products and appropriately classify them in terms of world class competitive position and potential. The resulting classification of the products were as below:
Class 1: Fuel Tanks
Class 2: Manifolds, Front and Rear Doors
Class 3: Muffler-exhaust systems and oil pans
The evaluation also found that overhead was 435% of DL dollar cost, which is excessive. Consequently, ACF outsourced the its Muffler-exhaust systems and oil pans in 1988 in order to stay competitive in its product line up. 60 DL jobs and 30 indirect jobs were slashed. Reducing downtimes and improving efficiency in the assembly line improved productivity.
In spite of the above corrective measures, the manifolds were further degraded from Class 2 to Class 3 and a move to outsource their production. And in spite of all the above measures, the plant was still losing business. The plant manager is looking for more options to stay competitive.
Looking at Exhibit 2 price chart for Bridgeton, there are two major problems with the way the cost is laid out in the chart 1. The costs are aggregated by year and not by the individual products. 2. The above is further complicated due to the fact that the overhead costs are aggregated across the various product lines offering no clarity on the volumes of the overhead resources needed by product. Further analysis of the overhead cost structure shows even though the Class 3 products have been outsourced, the overhead still remains high and even goes from than the previous already high 435% to 563%. Estimating 1991 product costs with increases commensurate with the 1989-1990 increases causes the OH costs go up even further to 666.5%. With the current product cost structure, the average profit for a $20,521 profit.
Exhibit # 2. The product costs trend up even after outsourcing the least efficient product lines. It is therefore important to understand the accurate costs and projected volume per product so correct BEV calculation is made possible.
Exhibit 3 calculates the product costs per product by allocating the Overhead as a percentage of the DL and then distributing the fixed/Variable OH costs as per the cost spread given in the table. Distribution of the OH costs as fixed manufacturing and fixed non manufacturing is based on whether the costs can be attributed to a product related manufacturing activity or not. Any machine/tool related cost is attributed to the fixed manufacturing OH cost. All other expenses are fixed non manufacturing period costs. The 1991 estimates assuming manifolds are outsourced are also calculated for Direct costs as well as overhead keeping the pace of growth similar as the previous year. So for the overheads (both manufacturing and non manufacturing), this means keeping them steady at 1.6% and 1.5% respectively to yield a total overhead of $68,099.67 . Please refer to the Exhiblt # 2 for breakdown details. The reported product costs can be made better by reporting the volumes of the products produced in the period which will in turn help to understand the fixed/variable nature of the costs for the overhead and provide better product costs as a whole. This will help establish a better distinction of unit costs and will aid us define the operating profit per unit in a clear way.