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Evaluate the effect of the move to the companys Plant margin, change in dollar, and change in PM...

Evaluate the effect of the move to the companys Plant margin, change in dollar, and change in PM%. Assume a 5% increase and decrease in volume would not affect fixed cost. Use Exhibit 8 and compute for Andovers Plant Margin by using Exhibit 9 and 10 information then make a comparison. Based on the sensitivity to changes in sales volume, which location is more desirable?

Exhibit 8: Income Statements for Danvers Assembly Business Unit

Revenue		$ 37,540,000	100%
Less Variable Costs:
Direct Materials	$ 27,302,000		73%
Variable Manufacturing OH	357,000		1%
Variable Support & Logistics OH	4,925		0%
Contribution Margin		$ 9,876,075	26%
Less Fixed Costs:
Assembly Labor	1,872,000
Support & Logistics Labor	1,144,000
Plant Administration and Management	480,000
Occupancy	928,000
Depreciation - Assembly Equipment	456,000
Depreciation - Furnishing and Fixtures	259,800
Depreciation Administration Assets	4,800
		$ 5,144,600	14%
Plant Margin		$ 4,731,475	13%
Capital Charge (cost of capital = 10%)		$ 1,805,600
Plant Economic Income		$ 2,925,875	8%

Exhibit 9: Estimates of Headcount Changes from PRIME Reconfiguration

	Current/Danvers	Projected/Andover
Assembly Labor	30	24
Support & Logistics Labor	22	12
Plant Administration and Management	4	4
	56	40

Exhibit 10: Excerpts from the Report on Potential Costs and Savings from Move to Andover

Some of the costs and savings related to the move are obvious. Certainly, a move to Andover would eliminate the need to pay the $400,000 per year lease in Danvers. Additionally, the costs of maintaining, heating, cooling, and securing the Danvers facility would be eliminated by the move. If the assembly operation could be successfully fit into the available space in Andover, it would simply be allocated a share of the current Andover facility occupancy costs. Based on space occupied, we estimate the assembly operations share of Andovers occupancy cost to be $499,000 per year.

There will have to be some investment in preparing the Andover facilities to house an assembly operation, including some equipment modification. The major expenditure will be for new ambient testing systems. Each system, consisting of a server and 50 test stations, will cost $600,000 to build and install. All of the old testing machines will be fully depreciated by the end of 2008 and sold for their salvage value for a net effect of no gain or loss. We estimate the economic life of these systems to be 10 years. We can move and reuse about half of the furnishings and fixtures currently in Danvers in the new facility in Andover. The remaining fixtures are leasehold improvements made to the building and cannot be moved. Those assets would have to be written off, except, luckily, they will be fully depreciated at the end of 2008. In Andover, we will have to spend $100,000 on new furnishings and fixtures to prepare the building for the assembly operation. Following company policy, those new leasehold improvements will be depreciated over 10 years. We can move all of the administration and management assets, which are primarily desks, computers, and other office furnishings. These were all replaced recently, so annual expenses related to their depreciation will remain unchanged.

We have planned the logistics on the move itself to be possible to execute over a three-day holiday weekend. There should be no loss of productive time. This will require several weekends of preparation and planning, however. There will be an out-of-pocket cost of $157,000 attached to the move.

The move will create savings in Andover. One immediate effect will be the removal of the need to shuttle engineers, parts, and equipment back and forth between Andover and Danvers. We estimate this savings to be $300,000 per year in combined out-of-pocket costs and recovery of lost engineers time. The out-of-pocket costs are the shuttle driver, whose fully-loaded annual cost is $35,000, and the annual lease, maintenance, and operating costs of the van. These costs are $10,000 per year. Another savings in Andover will come from the reassignment of occupancy costs currently covered by the existing business to the assembly operation. As detailed elsewhere in this report, we estimate that $499,000 per year will be reallocated to the assembly operation.

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