To: Bridgeton Management
The ACF plant had cutbacks throughout the 80s as a result of stiff competition caused by foreign competitors entering a market that was dominated by the US auto parts suppliers. As a result of declining market share, ACF is not only in competition with other suppliers but also other Bridgeton plants. The gross profit is declining due to increased costs in direct labor and direct material since 1987. Direct materials cost increased due to the high cost of steel in producing the manifolds. Direct labor cost increased due to the plant using people that were in the retained job pool by the union. More overhead cost was being allocated to remaining products when muffler/exhaust and oil pans were outsourced; as a result manifolds have absorbed a higher cost and are on the brink of being outsourced. Direct labor being cost driver for Overhead allocation, the manifolds product bears a huge portion of the cost of overhead.
With the trend in the industry changing and that the manifolds product is as such not yet incurring a loss, I would not recommend it being outsourced for the following reasons:
1. As two important lines – muffler/exhaust and oil pans being outsourced, the Overhead rate significantly increased from 435% to 566%. Despite of significant improvements in the production of manifolds and reduction in overall overhead costs, the fixed costs associated with other lines was burdened on to the manifolds product line. If outsourced, possibly the manifolds burden (like the muffler and oil pans) would shift to another product, which would in turn result in the plant shutting down. 2. As the auto industry is driven more by machines and labor and as plants being more machine intensive than labor intensive, having direct labor, as the cost driver for overhead allocation could be incorrect. The plant should have overhead allocation based on machine hours instead, which would give a better allocation base. 3. If emission...
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