Wriston Manufacturing Case Analysis

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.