Youngstown Products, a supplier to the automotive industry, has seen its operating margins shrink below 20% as its OEM customers put continued pressure on pricing. Youngstown produces four products in its plants and has decided to eliminate products that no longer contributed positive margins. Details on the four products are provided below:
4,000 Selling Price $15.00 $18.00 $20.00 $22.00 Materials/unit $4.00 $ 5.00 $6.00 $7.00 DLH/unit 0.24 0.18 0.12 0.08 Total DLH 2,400 1,440 720 320 Total DLH 4,880
Plant Overhead $122,000
DL rate/hour $30.00
Youngstown 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.
Calculate the plant-wide overhead rate. Use this rate to assign overhead costs to products and calculate the profitability of the four products.
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.
Drop any product that is unprofitable with the revised cost assignment. Repeat the process, eliminating any unprofitable products at each stage.
What is happening at Youngstown and why? How could this situation be avoided?
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