Art Conroy is the assistant controller of New City Muffler, Inc., a subsidiary of New City Automotive, which manufactures tailpipes, mufflers, and catalytic converters at several plants throughout North America. Because of pressure for lower selling prices, New City Muffler has had disappointing financial performance in recent years. Indeed, Conroy is aware of rumblings from corporate headquarters threatening to close the plant. One of Conroy’s responsibilities is to present the plant’s financial plans for the coming year to the corporate officers and board of directors. In preparing for the presentation, Conroy was intrigued to note that the focal point of the budget presentation was a profit-volume graph projecting an increase in profits and a reduction in the break-even point. Curious as to how the improvement would be accomplished, Conroy ultimately spoke with Paula Mitchell, the plant manager. Mitchell indicated that a planned increase in productivity would reduce variable costs and increase the contribution margin ratio. When asked how the productivity increase would be accomplished, Mitchell made a vague reference to increasing the speed of the assembly line. Conroy commented that speeding up the assembly line could lead to labor problems because the speed of the line was set by union contract. Mitchell responded that she was afraid that if the speedup were opened to negotiation, the union would make a big “stink” that could result in the plant being closed. She indicated that the speedup was the “only way to save the plant, our jobs, and the jobs of all plant employees.” Besides, she did not believe employees would notice a 2 or 3 percent increase in speed. Mitchell concluded the meeting observing, “You need to emphasize the results we will accomplish next year, not the details of how we will accomplish those results. Top management does not want to be bored with details. If we accomplish what we propose in the budget, we will be in for a big bonus.”
What advice do you have for Art Conroy?
The question belongs to Accounting and it discusses about increasing productivity to increase volume and ultimately to increase the profits in a subsidiary company that produces mufflers, tailpipes and catalytic converters.
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