Wriston Manufacturing Case Study Analysis Sample

Recommendations and benefits:

  • Detroit plants used to perform well in the past years but now the plantsare suffering from the bad performance of the plant. The reason behind this downturn is because of lack of investment in the plant section. The investment is decreasing year on year basis and depreciation is increasing. The plants need investment equal to or above depreciation for better performance.
  • Currently, the level of output is very low per batch because of old style of machinery there at the factory. There is a need of latest machinery through which the factory can have better volume output.
  • Detroit is suffering absenteeism on Mondays and Fridays, along with that there is a high labor turnover. The labor turnover is in below 30 years age and new employees due to lack of innovative machinery to work for and no facilities like canteen and other pleasures for employees. It should focus on their enjoyment and leisure for its employees.
  • The costing system consist all its labor and overhead cost are included in variable even though the nature is fixed. It should change its costing system and divide it in variable and fixed cost to clearly understand the cost centre that needs to be revised for cost purpose and cost cutting.

Expected implementation risks and costs:

            There are three options asked for to rectify the problems associated above. The best suitable option is option number one, to close the plant as soon as possible and transfer its products to other. The major risks for implementation of the option are that it requires a huge investment of $17 million implementation and $6 million redundancy cost. The inflows are only $4 million from sale of the plant. The future cash inflows are not certain because future is most unpredictable. Currently, 10% discount rate is suggested but the required return may change because the project is for 20 years. The future cash inflows are uncertain, also it may not be possible that there can be a saving of labor and material cost in future periods.

Conclusion:

            The most suitable option is option one and also tool cost must be incurred on Maysville that gives an annual return of $2.7 million, labor saving of 5% and material saving of 2%. It is the only option with positive NPV of $5.3 million; other options are giving negative NPV (exhibit).

            Thank you

Exhibit

 

Option 1

Close the plant and transfer its products to other plants:
Group 1
Direct labor cost saving              29,600
material cost saving            127,800
after tax cash inflows for Maysville         2,700,000
Annual saving for 20 years         2,857,400
Discount rate

10%

Annuity factor for 20 years                  8.51
Present value of Future cash flows       24,326,761
Initial Cost       17,000,000
Closure Cost         6,000,000
net inflow from sell of plant         4,000,000
NPV         5,326,761
Group 2
Direct labor cost saving              30,960
material cost saving              43,400
after tax cash inflows for Saginaw         1,000,000
Annual saving for 20 years         1,074,360
Discount rate

10%

Annuity factor for 20 years                  8.51
Present value of Future cash flows         9,146,671
Initial Cost         8,000,000
Closure Cost         6,000,000
net inflow from sell of plant         4,000,000
NPV          (853,329)
Option 2Factory Continuation
Annual expense                        2,000,000
Cash Inflows                        1,900,000
Annual Loss                           100,000
Option 3Purchase of new Plant
Annual net Cash inflows                  3,000,000
discount rate

10%

Annuity Discount factor                         10.00
Net Cash Inflows                30,000,000
Scrap Value Receipt                     400,000
Present value of cash inflows                30,400,000
Initial Investment                30,000,000
Startup Cost                  4,000,000
Total initial cost                34,000,000
Net Present Value                (3,600,000)

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Wriston Manufacturing Case Solution

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Wriston Manufacturing

Wriston Manufacturing Corporation, a multi-billion dollar corporation with products targeted at North American transportation industry, had seen a decline in sales over the last three years and as a result under-performing plants of Heavy Equipment Division (HED) such as Detroit and Lima were coming under increased scrutiny on their future financial viability. The Heavy Equipment division of the Automotive Supplier group of the Wriston Manufacturing Corporation is a large axle and brake manufacturer having three broad product lines which are being manufactured in its nine plants. The Detroit Plant which is the oldest plant of HED has been operating at low profitability level for the past few years. Due to several factors explained in issue analysis, operation of the plant is not considered viable over a long term and hence a decision needs to be made about the future of the plant. The options are: 1 Close down the plant and transfer the products to other plants. 2 Invest in plant tooling so that the plant could be operated profitably for the next 5- 10 year period and then decide its fate. 3 Build a new plant to accommodate some or all of the Detroit plant products Issues Analysis. Financial Analysis

Selling the plant would cause immediate cash inflow of $4,000,000 and $6,000,000 loss from employee termination. While the company has $2,000,000 loss, this option results in the highest net present value for Wriston Manufacturing. In this option the Detroit product share segmented into three groups and redistributed to other factories. Group 1 products are sent to Lancaster, and Group 2 products are sent to Lima, while Group 3 products are terminated. This plan yields a net present value of $24,595 million. We assume that both plants will operate for 20 years and will be sold in their last years of operation. The terminal value of the sale of the Lancaster factory would be $13,568. We take 4,000,000 as the terminal value of the Detroit factory multiplying it by 2 assuming that our factory will be sold in 20 years instead of 77 and that the highest amount of depreciation will occur in the first 50 years. After that we compare all the factories in terms of their capacity with the Detroit factory and calculated the ratio of capacity between the factories. After that we used the discount factor of 0.8 as we assume that a factory twice as big would not cost twice as much. We do the same calculations for the Lima factory, which results in a terminal value of $7,680. Qualitative Analysis

Given the nature of factory operations, we need to recognize the current underutilization of the Lancaster and Lima factories. If we transfer our production to more specialized facilities, we can be more efficient with our production as well as solve the problem of under-utilization in factories where it exists. While it is true that transferring the Group 2 products to Saginaw would result in a higher NPV than transferring to Lima as we recommend, we also note that Saginaw was already utilizing $94.2 million of its $100 million capacity. Adding additional strain to this factory could cause operation problems such as overworked workers, therefore it is best to transfer the Group 2 products to the Lima plant, which is only utilizing $12 million of its $60 million capacity. In additional consideration, we recognize that since the majority of Wriston factories are close to the Detroit plant, the customers who acquire their product from the Detroit plant will still be able to purchase their product, upon plant close and redistribution of product. Conclusion

The Detroit plant should not focus on total overhead burden rate as a key indicator of profitability. This results in an “apples to oranges” dilemma when comparing Detroit to other Wriston plants. Wriston produces products that require much more set-up time as well as a the largest number of product families when compared to other plants. The Detroit plant should focus on a few key “goals” as leading indicators of profitability. Wriston’s utilization was 70%. There appears to be some upside profit potential if sales and manufacturing can utilize the unused capacity and convert this to additional profit.

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