Internal and external factors effecting the cost position Essay

The increased imports of the European as well as the Japanese make of automobiles in the United States significantly impacted the demand of the automobiles manufactured by the US manufacturers. â€Å"Imports of sub-compact cars from Europe and Japan rose steadily in the 1950s, often as families’ second cars but US manufacturers retained their hold on the lucrative markets for larger vehicles. † (French, 1997, p142) The US manufactures saw their market shrink as the more aware and price conscious consumers shifted to the European and Japanese counter parts for their automobiles, while the US manufacturers were left with making large, excessive fuel consuming vehicles that denoted social status and personal style. Aside from this the increasing prices of crude oil in the international market in the 1970s also significantly changed the demand of the automobiles as depicted by the consumers. â€Å"A crisis in the US car-market developed as a result of sudden unforeseen shifts in the general environment which allowed overseas producers to expand market share rapidly. New car sales faltered in the 1970s and excess capacity increased. At the same time the leap in fuel prices shifted the consumer preference towards smaller, more fuel efficient cars which Japanese and European makers already supplied in their domestic markets and were better able to produce that were the US manufacturers used to making larger, more up-market ‘gas-guzzlers’† (French, 1997, p142) The automobiles of French and Japanese make were smaller, more fuel efficient as well as more stylish yet cheaper than the those manufactured by the big three US automobile manufactures. As a result the consumers opted for purchasing the imported cars instead of those manufactured by the Unites States manufacturers. The recession of the 1970s also further reduced the disposal income and the propensity to save for the people in the United States which made purchasing the imported European and Japanese models of automobiles much more attractive to the consumers instead of opting for those models manufactured by the big three US automobile manufacturers. In the same period the perception of the consumers also significantly changed as was marked by the baby boomer generation and the hippy era. In this period, the consumer became more aware of the environment, the increasing pollution and the contribution that automobiles made towards adding to the pollution levels. As a result the consumers started to look for cheaper alternatives of travel and those which were more environmental friendly that the vehicles manufactured by the big three US automobile manufacturers. The internal factors that contributed to the changing cost position of the Bridgestone Industries, specifically at the plant pertained to the decreasing demand of the US manufactured cars and increased demand for cheaper cars that was reflected un the restricting cost based purchases being made by the big three manufactures form the Bridgestone Industries. As the volume of sales decreased for Bridgestone Industries, along with the margin for profits on sales made due to the rising overhead costs the cost position of the Bridgestone Industries significantly changed to become negative and resulted in the closing of the automotive component and fabrication facility by the Bridgestone Industries. Overhead Burden Rate The Bridgestone Industries had a specific method for determining the overhead burden rate for the products that was proposed and set on an annual basis. â€Å"The budgeted unit costs provided by the plant for the 1987 model year study included overhead (burden) applied to products as a percentage of direct labor dollar cost. The overhead percentage was calculated at the budget time and used throughout the model year to allocate overhead to products using a single overhead pool. The overhead rate used in the study was 435% of direct labor cost† (Patricia & Cooper, 1993) The following table depicts the overhead burden rate for the years starting 1987 through to 1990. Overhead Burden Rate (‘000) 1987 1988 1989 1990 Total Overheads 107,954 109,890 78,157 79,393 Total Direct Labor Dollar Cost 24,682 25,294 13,537 14,102 Overhead Burden Rate 437 434 577 562 The analysis of the overhead burden that was determined for the years, 1987, 1988, 1989 and 1990 showed that the total over heads increased from 1987 to 1988. However in 1989, there was a drop in the overhead level as the muffler exhausts and the oil pan based product lines were merged with the other three product lines. This reduced the overheads significantly. In 1990 however the trend shows that the overheads for the Bridgestone Industries increased again on an annual basis. The direct labor dollar cost showed a similar trend as well reflecting the increasing expenses along with the effect that the closure of the muffler/exhaust and oil pan lines had on the labor cost. The overhead burden rate that was determined pertained to approximately 437 percent in 1987, 434 percent in 1988, 577 percent in 1989 and 562 percent in 1990. The following table depicts the overhead burden shared by the respective product lines at the Bridgestone Industries for the years starting 1987 through to 1990. Overhead Burden Share per Product Line (‘000) Overhead Burden 1987 1988 1989 1990 Fuel Tanks 18,234. 35 18,412. 03 25,490. 37 25,891. 96 Manifolds 25,744. 16 26,184. 35 36,246. 56 36,819. 62 Doors 11,463. 72 11,864. 85 16,420. 07 16,681. 43 Mufflers/Exhausts 24,646. 33 25,050. 44 0 0 Oil Pans 27,865. 45 28,378. 33 0 0 107,954 109,890 78,157 79,393 The overheads shared by the respective product lines also depicted significant change in the years from 1987 to 1990. On average the oil pans product line had the largest overheads allocated to its while the product line for the front and rear doors had the lowest overhead levels for the years 1987 and 1988. When the product lines were merged in 1989, the manifolds product line had the largest level of overheads allocated to it, while the product line for front and rear doors had the lowest level of overheads assigned to it. On a year to year basis, the overhead burden level has decreased by a small gradual percentage over the four years highlighted. This is not due to the fact that the overheads for the company have been decreasing; instead this has occurred due to the fact that the dollar cost of the direct labor has incrementally increased over the four year period as well resulting in the decrease in the overhead burden rate.