Wriston Manufacturing Corp. is a company that focuses on the production of many components for the automotive industry. The company has a network of nine plants. One of its plants, the Detroit Plant, is the oldest and produces a variety of product lines, leading to higher overhead costs. The company must decide how to make this plant more profitable or whether it is best to close it down.
Janice H. Hammond
Harvard Business Review (698049-PDF-ENG)
December 01, 1997
Case questions answered:
- Why do overhead costs vary so greatly from plant to plant in Wriston Manufacturing Corp.’s manufacturing network?
- Why have managers in the Heavy Equipment Division under-invested in the Detroit Plant?
- What should Richard Sullivan do with the Detroit Plant? Justify your recommendation.
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Wriston Manufacturing Corp. Case Answers
Variation of Overhead Cost in Wriston Manufacturing Corp.
Overhead costs are the expenses incurred during the production, administration, selling, and distribution process, which are necessary for making all these processes possible. However, the activities from this expense have no links to creating a product or service. Additionally, the services provided through overhead expenses, by themselves, are not of any use.
On the basis of nature, Overhead costs can be divided into the following:
1.) Fixed Overhead
These types of overheads are generally uncontrollable and do not tend to change due to fluctuations in output. E.g., depreciation of buildings and equipment.
2.) Variable Overhead
These are controllable types of overhead costs. They are affected by the volume of the output or the product produced. E.g., Rework cost.
According to the given case, the overhead cost of the various plants of Wriston Manufacturing Corp. differs greatly.
The following are the factors responsible for the above case.
Plants that are more focused or are producing only a few types of product models and product families are incurring very low overhead expenses relatively. This is because they require lesser machining tools and a lower amount of varied machining operations.
In the given case study, the Detroit plant produces 120 different product models along with 20 product families (Exhibit 2). This is the highest than any other Wriston Manufacturing Corp. plant, making the Detroit plant the most complex among the others. This is one of the sole reasons for its high Overhead cost.
2.) Lower Sales / Lower Functioning of plant
In 1991, the Lima Plant in Ohio functioned at only 20% of its total capacity. The drop in the sales of the Lima plant resulted in a higher burden cost or overhead cost for the plant. This is because, although the volume of sales decreased and the plant has comparatively lower variable overhead, the fixed, variable overhead, such as the depreciation of machines, equipment, facility, and salary of permanent employees, remains high.
3.) Plant Investment
Investments in plants like Fremont, Ohio, are higher as compared to the old plants such as the one in Detroit. Due to this, the Fremont plant is a very high technology plant and accounts for the highest sales of product lines in 1991 and incurs lower overhead expenses relatively.
Whereas, due to lower investment, the Detroit plant uses older machining tools and equipment and, hence, bears a high overhead cost. Moreover, the old and unplanned building of the Detroit plant further aggravates its high overhead expenses.
4.) Number of employees
The number of employees accounts for overhead expenses as you need to provide salaries as well as fringe benefits to every employee in the organization. You also have to incur training expenses for each of the new employees.
In the case of Wriston Manufacturing Corp., there are…
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