Description:

You are consulting for the Kentucky Truck Plant Manager, Fergie Ferguson. Fergie is considering automating a major portion of the manufacturing process. She has provided you with as much data as she has. She has asked for to help her to determine which alternative, status quo or automation, will enhance the profitability of her plant.

Fergie is also concerned that the automated process might change the end-of-year planned Raw Material, Work-in-Process, and Finished Goods inventory that will be on hand.

Finally, Fergie is launching a new high-end truck, called the F-350 Thunderbird. The manufacturing process for the Thunderbird model is highly labor-intensive and will be unaffected by Fergies decision whether to implement the automated process. Given this, Fergie is interested in how much manufacturing overhead would be allocated to each unit of the Thunderbird truck under the status quo option, and how much manufacturing overhead would be allocated under the automated manufacturing process.

Deliverables:

• Identify the costs and benefits and value of each alternative. Identify those data that are relevant to the decision at hand
  1. Identify those data that are relevant to the decision at hand
  2. Offer a recommendation to Fergie Ferguson, including both quantitative and qualitative justification
• Identify the end-of-year Raw Material, Work-in-Process, and Finished Goods inventory balances for each alternative
• Calculate the Manufacturing Overhead allocated to each individual F-350 Thunderbird truck under each alternative
  1. Explain why there is a difference between the manufacturing overhead allocated to each Thunderbird truck
  2. Comment on whether you believe the manufacturing overhead allocation is appropriate under each alternative

Case Data:

Status Quo

• 300,000 units sold
• Average Selling Price = $50,000 per truck
• Expected Cost of Goods Sold
  • $22,000 Direct Materials per truck
  • $1,650 Direct Labor per truck
  • $1,800 Variable Manufacturing Overhead per truck
  • $1,365,000,000 Total Fixed Manufacturing Overhead
• Expected Selling, General, and Administrative (SG&A) Costs
  • $3,900 Variable SG&A per truck
  • $3,030,000,000 Total Fixed SG&A
• Beginning Inventory Balances:
  • Raw Materials = $75,000,000
  • Work-in-Process = $350,000,000
  • Finished Goods = $450,000,000
• Manufacturing Cost Flows:
  • Raw Materials Purchased = $6,660,000,000
  • Raw Materials introduced into Production = $6,650,000,000
  • Direct Labor Used = $500,000,000
  • Manufacturing Overhead Allocated to Work-in-Process = $1,925,000,000
  • Cost of Goods Manufactured = $9,050,000,000

• Pre-determined Manufacturing Overhead Rate Data (per Direct Labor Hour)
  • Estimated Total Manufacturing Overhead = $1,925,000,000
  • Estimated Direct Labor Hours Used = 10,000,000 hours

• Direct Labor Hours Budgeted for the F-350 Thunderbird = 7,800

Automated Manufacturing Process

• 300,000 units sold
• Average Selling Price = $50,000 per truck
• Expected Cost of Goods Sold
  • $22,000 Direct Materials per truck
  • $1,650 Direct Labor per truck
  • $1,350 Variable Manufacturing Overhead per truck
  • $1,780,000,000 Total Fixed Manufacturing Overhead
• Expected Selling, General, and Administrative (SG&A) Costs
  • $3,900 Variable SG&A per truck
  • $3,030,000,000 Total Fixed SG&A

• Beginning Inventory Balances:
  • Raw Materials = $75,000,000
  • Work-in-Process = $350,000,000
  • Finished Goods = $450,000,000
• Manufacturing Cost Flows:
  • Raw Materials Purchased = $6,730,000,000
  • Raw Materials introduced into Production = $6,710,000,000
  • Direct Labor Used = $330,000,000
  • Manufacturing Overhead Allocated to Work-in-Process = $2,190,000,000
  • Cost of Goods Manufactured = $9,190,000,000

• Pre-determined Manufacturing Overhead Rate Data (per Direct Labor Hour)
  • Estimated Total Manufacturing Overhead = $2,190,000,000
  • Estimated Direct Labor Hours Used = 6,000,000 hours

• Direct Labor Hours Budgeted for the F-350 Thunderbird = 7,800