A manufacturer of hydraulic control devices – valves, pumps & flow controllers. Currently the company is undergoing a severe economic impact from price cutting in pumps one of its major product lines. This has led to decline in its profits in this line of business – (as illustrated below)
| Sales | 1847500 | | |
| Variable Expenses | 809000 | | |
| Contribution | 1038500 | 56.21% | |
| | | | |
| Machine related expense | 334800 | | |
| Setup Labour | 117000 | | |
| Receiving & production control | 15600 | | |
| Engineering | 78000 | | |
| Packaging & Shipping | 109200 | | ...view middle of the document...
These increases were necessary to handle the small production runs & many shipments now requested by customers and for developing the process routines used to build newly introduced flow controller models.
The data collected by Knight from the manufacturing control system about the production run shipments and distribution of engineering personnel is shown in (exhibit 4)
Following are the observations –
* Average production run for valves is 375 units – 7500/20 (units /production run)
* Average production run for flow controllers is 18 units – 4000/225 (units /production run)
* Average valve shipment is 188 – 7500/40 (units/number of shipments)
* Average flow controller is 8 units – 4000/200 (units/number of shipments)
This shows that the flow controller is using indirect resources disproportionately from its shares of the company revenue and units sold.
The company is spending more on overhead than on direct labour or material. The company has considerable diversity in its product mix.
* Valves need little technical support are produced and shipped in large batch sizes
* Flow controllers are produced and shipped in small batch sizes and require extensive technical support.
This combination of high spending on indirect and support resources and high variety in product shows a heavily distorted cost.
A time –driven ABC model for Sippican’s manufacturing operations is launched. This will quantify the impact of each product line’s use of indirect resources financially. The information collected on the points is mentioned in the case (5 points)
Now the capacity cost rates for each major production process needs to be estimated – fabrication, assembly, setup, receiving and production control, packaging & shipping and engineering. Illustrated below is the calculation of capacity cost rates for resources.
| Emp days | Mthly cost | pd hrs per day | productive hrs per day | hours per month | cost per hr |
Production workers | 20 | 3900 | 7.5 | 6 | 120 | 32.5 |
Indirect workers | 20 | 3900 | 7.5 | 6.5 | 130 | 30 |
Engineers | 20 | 9700 | 7.5 | 6 | 120 | 81.25 |
Machines | 20 | 5400 | - | 12 | 240 | 22.5 |
Following is the monthly resource cost and utilization that shows the aggregate supply, cost & utilization of Sippican’s production resources.
| Units |...