Wriston Manufacturing Harvard Case Solution & Analysis

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 2 Factory Continuation
Annual expense                         2,000,000
Cash Inflows                         1,900,000
Annual Loss                            100,000
Option 3 Purchase 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)

 .............................

Wriston Manufacturing Case Solution

This is just a sample partial work. Please place the order on the website to get your own originally done Case Solution

Other Similar Case Solutions like

Wriston Manufacturing

Share This