Scott Mills was originally a producer of fabrics, but several years ago intense foreign competition led management to restructure the firm as a vertically integrated cotton garment manufacturer. They purchased spinning firms that produce raw yarn and fabricators that produce the final garment. The firm has both domestic and international operations.
The domestic spinning and knitting operations are highly automated, using the latest technology. The domestic operations are able to produce cotton fabric for $0.76 per pound. The domestic fabricating operations are located exclusively in rural areas. This keeps total average labor costs to $8.20 per hour (including fringe benefits). The cost to ship products to the firm’s distribution center is $0.05 per pound.
The firm’s foreign subsidiary is a fabricating operation located in the Maldives (a group of islands near India). The average wage rate there is $0.35 per hour. The subsidiary purchases cotton fabric locally for $0.80 per pound. The finished products are shipped to Scott Mills’ distribution center in New Orleans at a cost of $.90 per pound. Both the domestic and foreign subsidiary use the same amount of fabric per product.
Scott Mills has been producing three products for the private label market: sweatshirts, dress shirts, and lightweight jackets. In the past the firm processed a new order at whichever fabricating plant had the next available capacity. However, projections for the next few years indicate that orders will far exceed capacity. Management wants each plant to specialize in one of the products.
The plants are constrained by the amount of sewing time available in each. The domestic plant has 8,000 hours of sewing machine time available per week, while the foreign subsidiary has 10,000 hours available per week. The domestic plant’s variable overhead is charged to products at $2 per machine hour, while the subsidiary’s variable overhead averages $0.50 per machine hour.
The sweatshirts require one pound of cotton fabric to produce, the dress shirts use four ounces of fabric, and the jackets require one pound of fabric. The domestic plant has special-purpose equipment that allows workers to sew a sweatshirt in 6 minutes, a shirt in 15 minutes, or a jacket in 1 hour. The foreign plant’s equipment constrains production to 5 sweatshirts per hour, 3 dress shirts per hour, or 2 jackets per hour. The wholesale prices are $7.35 each for the sweatshirts, $3.75 for the dress shirts, and $13.50 for the jackets.
The Controller has asked you to write a one-page (font 12 with a one inch margin on all sides) double spaced memo (that is all he is going to read) to the Board of Directors, addressing the following questions. The memo should include a discussion of your recommendations and any additional information that needs to be included. Attach supporting schedules to back up your recommendations in the memo. These schedules will later be made into transparencies and used by you and the Controller for presentation to the Board of Directors, so the information should be clearly labeled and understandable. You will be graded on the clearness of presentation as well as the accuracy of your analyses. The memo and the schedules must be typed.
The questions are as follows:
1. Due to the tremendous difference in wage rates, should the firm close its domestic operations and expand the foreign subsidiary?
2. If demand for each product far exceeded capacity, which product should each plant specializein?
3. Management insists on making all three products in order to maintain their good customer relations. If demand for each product far exceeded capacity and each plant specialized according to your answer to question (b), at which plant should management produce the other product(s)?