Bridgeton Industries

Authors: Philip Larson

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

1) Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? Equation: Overhead Allocation Rate = overhead for period / allocation base for period Example Allocation Bases: Direct labor dollars, direct labor hours, machine hours, direct material dollars, etc.

1987 1988 1989 1990

107954 24682 122365 330154 109890 25294 127363 351071 78157 13537 66956 216338 79393 14102 69546 226542

The changes in 1988 do not appear significant. However, the changes in overhead allocation rates in 1989 and 1990 do appear to be significant when compared to 1987 rates. The reason these changes have occurred can be seen below. Essentially, between 1988 and 1989 total overhead costs decreased at a slower pace than direct labor costs, direct material costs and sales. The case stated that at the end of the 1988 model year oil pans and muffler exhaust systems were outsourced from the ACF which could help explain why direct labor costs and material costs went down faster than overhead.

2) Calculate the expected gross margins as a percentage of selling price on each product based on 1988 and 1990 model year budgets, assuming selling price and material and labor cost do not change from this standard.

To ta lO ve rh Di ea re d ct (O La H) bo Di rC re ct os M ts at (D er Sa LC ia le ) lC s os ts (D OH M /D C) LC OH /D M OH C /S al es

437% 434% 577% 563%

88% 86% 117% 114%

33% 31% 36% 35%

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson Equation: Gross margin = sales revenue cost of goods sold To find the gross margin, we must figure out the cost of the goods sold. The cost of the goods sold will include the labor costs, the material costs as well as a portion of the overhead costs.

Therefore, the gross margin percentages go down significantly from 1988 to 1990. The reason for this is because the overhead allocation rates went up significantly making the overhead costs for each product significantly higher in 1990 than in 1988. 3) Prepare an estimated model year budget for the ACF in 1991. What will the overhead allocation rates be under the two scenarios. Equation: Standard cost = expected (budgeted) cost for a given period Scenario 1: Under scenario 1, no additional products will be dropped in 1991 from 1990. Therefore, the change in overhead allocation rate from 1990 to 1991 will be similar to the change from 1987 to 1988 (another year where the product line did not change significantly). The differences in 1987 to 1988 are fairly negligible. If we assume that change in overhead from 1990 to 1991 will also be negligible because the product line has not changed, then the 1991 overhead allocation rate will be the same as the 1990 overhead allocation rate of 563%. Scenario 2: Under scenario 2, the manifolds products will be dropped in 1991. Therefore, the challenge is to figure out how much the 1991 overhead is likely to drop from the 1990 given that part of the overhead is unnecessary if manifolds are not being produced. This is analogous to the drop in overhead from 1988 to 1989 when ACF dropped mufflers and oil pans. Additionally, we must also figure out how much total direct labor costs are likely to go down now that manifolds are not being created. Assumption 1: I assume that the change in overhead divided by the change in direct labor is constant. That is, OH/DLC = k. The best example of calculating this change is to look at what happened from 1988 to 1989 when ACF dropped mufflers and oil pans.

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

Assumption 2: Given that DLC for manifolds in 1990 was 6,540 and these will all go away in 1991 if manifolds are dropped, I assume that DLC = 6540 from 1990 to 1991. Therefore, OH = 6540 * 2.699 = 17652, and OH1991 = 79393 - 17652 = 61,742. Therefore, the Overhead Allocation Rate for 1991 would be OH1991/DLC1991 = 61,742/(14102-6540) = 816%