Youngstown Products, a supplier to the automotive industry, had seen its operating margins shrink below 20% as its OEM customers put continued pressure on pricing. Youngstown produced fours products in its plant and decided to eliminate products that no longer contributed positive margins. Details on the fours products are provided below:
Production volume (units)
Youngstown has a traditional cost system. It calculates a plant-wide overhead rate by dividing total overhead costs by total direct labor hours. Assume, for the calculations below, that plant overhead is a committed (fixed) cost during the year, but that direct labor is a variable cost. 1. Calculate the plant-wide overhead rate. Use this rate to assign overhead costs to products and calculate the profitability of the four products. The assignment spreadsheet provides a starting point for your calculations, with some data formulas already supplied. 2. If any product is unprofitable with this cost assignment, drop this product from the mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Apply the new overhead rate to the remaining products. 3. Drop any product that is unprofitable with the revised cost assignment. Repeat the process, eliminating any unprofitable products at each stage 4. Why is this happening at Youngstown and why? How could this situation be avoided?
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