Wriston Manufacturing Corporation operates several plants with large differences in overhead rates. The Detroit plant has the highest overhead rate-more than twice the rate of the lowest overhead plant, Maysville. As a result, the corporation is considering closing down Detroit and transferring its production to a lower overhead facility such as Maysville.What will be the effect of transferring the entire production of Detroit to Maysville and why? (Assume capacity is not an issue)

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The Answer is We know that overhead burden rates are driven (1) favorably by scale economies (i.e. volume) and (2) unfavorably by complexity (i.e. set-ups,..) ,Transferring to Maysville will hardly impact volume but seriously impact complexity. As a consequence, overheads at Maysville will increase.Because of Detroit's focus on complexity and Maysville focus on volume, the deterioration of Maysville overhead will be worse than the gain at Detroit.

Wriston Manufacturing Corporation Operates Several Plants with Large Differences in Overhead