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In: Business and Management

Submitted By dmd1234
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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 four products in its plant and decided to eliminate products that no longer contributed positive gross margins. Details on the four products are provided below: Product A B C D Total
Production Volume (units) 10,000 8,000 6,000 4,000
Selling Price $15.00 18.00 20.00 22.00
Direct Materials/unit $ 4.00 $ 5.00 $ 6.00 $ 7.00
Direct Labor Hours/unit 0.24 0.18 0.12 0.08
Total Direct Labor Hours 2,400 1,440 720 320 4,880
Plant Overhead $122,000
DL rate/hour $30

Youngstown has a traditional cost system with the plant-wide overhead rate calculated 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 material and direct labor are flexible (variable) costs.
1. Calculate the plant-wide overhead rate. Use this rate to assign overhead costs to products and calculate the profitability of the four products.
2. If any product is unprofitable with this cost assignment, drop this product from the mix.
3. Return to step 1. Recalculate the overhead rate based on the remaining total direct labor hours in the plant, and apply the new overhead rate to the remaining products.
4. Continue to cycle through steps 1–3 until all the products have been dropped and the plant is not longer producing any products. What is happening at Youngstown and…...

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