Youngstown Products*

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 no longer producing any products. What is happening at Youngstown and why?

Youngstown Products, a supplier to the automotive industry, has seen substantial shrinkage in both sales, which have decreased by a total of 11% during the last five years, and in operating margins, which have shrunk below 20% as its OEM customers put continued pressure on pricing. Youngstown produces four products in its plant and has decided to eliminate products that no longer have 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 For the calculations below, assume that plant overhead is a committed (fixed) cost, but that direct material and direct labor are flexible (variable) costs. That is, Youngstown manages direct labor in proportion to output, hiring and firing people to adjust direct labor to different levels of production. To account for the committed overhead costs, Youngstown has a traditional cost system, with the plantwide overhead rate calculated by dividing total overhead costs by total direct labor hours. 1. Calculate the plantwide 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 no longer producing any products. What is happening at Youngstown and why