Bridgeton Industries Case Study The Automotive Component and Fabrication Plant (ACF) is part of Bridgeton Industries.

They supplied components to the Big-Three domestic automobile plants. During the 1980s ACF experienced cutbacks due to foreign competition. In 1987 Bridgeton Industries hired a strategic consulting firm do determine the potential of the remaining production at ACF. After analysis, the consulting firm suggested that muffler-exhaust systems and oil pans components should be outsourced, and the production of manifolds should be watched for either improvement or decline. In 1990, after a period of observation the consulting firm suggested that manifold production should be considered a candidate for outsourcing. We are reviewing the information used by the consulting firm to determine if the production of manifolds should be outsourced. The consulting firm estimated that overhead should be allocated to products at 435% of each products direct labor cost. This percentage seemed accurate in 1987 and 1988, as the overhead rates were 437% and 434%. However, this did not hold true after products were discontinued in 1989. At 435% direct labor, we would have expected overhead to decrease by about $53,450, or 48%. The actual decrease in overhead, however, was only $31,733, or 28%. In 1989 the overhead rate was 577%, and in 1990 it was 563%. This indicates that the direct labor allocation rate used is not a sufficient way to assign overhead to products. Between 1988 and 1989 total overhead cost decreased at a slower rate then DMC, DLC, and sales did.

1987 1988 1989 1990

OH $107,954 $109,890 $ 78,157 $ 79,393

DLC $24,682 $25,294 $13,537 $14,102

DMC $122,365 $127,363 $ 66,956 $ 69,546

Sales $330,154 $351,071 $216,338 $226,542

OH/DLC 437% 434% 577% 563%

OH/DMC 88% 86% 117% 114%

OH/Sales 33% 31% 36% 35%

The product costs and cost system used were probably not appropriate to use for strategic planning after muffler-exhaust systems and oil pans were outsourced. As we saw from the overhead estimates, allocating overhead to the correct product is important in order to understand the profitability of each product. The current system lumps all overhead into one category. The overhead cost should be traced and allocated to each product when appropriate. Also, common costs should not be allocated to individual products, especially if the cost wont disappear if the product is outsourced. We need a better break down, because when saw when total overhead cost decreased at a slower rate than every thing, this might be an indicator that we need a more efficient most measurement. Operating under the assumption that sales volumes and material costs are unchanged from 1990 to 1991 we would expect total costs of $163,041, sales of $226,542, and a factory profit of $63,501. According to our best projection, if manifold production were outsourced, ACF would fail to realize $32,121 in profits. This estimate was made by comparing estimated costs attributed of the manifold production to estimated sales profits. The estimated sales revenue of manifolds is $93,120. The cost attributed to manifold production is $42,265 for direct materials and direct labor, and a portion of the overhead, which we estimated to be $18,734. We arrived at this estimate by separating variable overhead from fixed overhead,

then dividing the variable overhead by 223%. We arrived at this percentage by dividing our estimated variable overhead by the direct labor costs. Based on our projections we recommend keeping manifold production at the ACF. There are many potential benefits for doing this. The production of manifolds is highly automated. If the sale of manifolds increases, due to new emission standards, production can be increased at insignificant increases to direct labor. Even though when mufflers and oil pans were outsourced and our total overhead fell, our overhead allocation rate increased from 34% to 577%This is because the fixed cost from muffles and oil pans where transferred to the remaining product lines. We also assume this will remain true if manifolds are outsourced and it too will also increase the allocation rate. In conclusion, the consulting firms overhead cost allocation method did not work, possibly because they allocated common costs into product segments. After the products were discontinued, the common costs remained and were then spread between the remaining products. The consulting firms methods resulted in their recommendation to outsource manifold production, a product that we feel can be profitable for the company, especially if sale volumes and prices can increase due to new demand. In order to get more accurate cost information, we recommend ACF revise their cost system. It is important to keep product costs associated with the correct products. It is also necessary to not associate any common cost with specific products.