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Bridgeton Industries Cost Analysis

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[pic] Course: 45-701 Submitted to: Prof. Zhaoyang Gu Submitted by: Neha Arya Marc Brands Anil Konjalwar Alok Satyawadi Competitive Environment The ACF plant has experienced serious cutbacks throughout the 80s due to competitive pressure caused primarily by the entrance of foreign competition in a market formerly dominated by US auto manufacturers and the oil shock of the 70s. The expensive gasoline has started a trend in the auto industry for fuel efficiency resulting in ever increasing emission standards.

With the resulting loss of domestic market share, ACF is facing intense competition from not only other suppliers but other Bridgeton plants as well.

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The task of remaining cost competitive is daunting as outsourcing seems to be catching on as a way to cut costs. Overhead Burden Rate We have used direct labor as the allocation base to calculate the figures given below. However machine hours may be a better allocation base as the plants are highly mechanized. From Budgets |1988 |1989 |1990 | |[Total Overhead/Direct Labor] x 100 |109,890/25,294 |78157/13537 |79393/14102 | | Rate |434% |577% |563% | Gross Margin % |Product 1 |1988 |1989 | |Price | $ 62.

00 | $ 62. 00 | Material Cost | $ 16. 00 | $ 16. 00 | |Labor Cost | $ 6. 00 | $ 6. 00 | |Overhead Cost | $ 26. 04 | $ 34. 62 | |Profit | $ 13. 96 | $ 5. 38 | |Gross Margin |23% |9% | |Product 2 | | | |Price | $ 54. 00 | $ 54. 00 | |Material Cost | $ 27. 00 | $ 27. 00 | |Labor Cost | $ 3. 00 | $ 3. 00 | Overhead Cost | $ 13. 02 | $ 17. 31 | |Profit | $ 10. 98 | $ 6. 69 | |Gross Margin |20% |12% | Note: The overhead rate for ’88 and ’89 is 434% and 577% respectively This exercise illustrates how profitability is related to the overhead allocation rate and what a big impact overhead allocation can make towards the profitability of a product even when the total overhead has fallen dramatically (because of the outsourcing of muffler/exhaust and oil pans).

The gross margin fell significantly for both products when the overhead rate used was increased from 434% to 577% due to product eliminations. Fixed Costs Fixed costs are defined as costs that do not change with the level of business activity. By this we mean those costs that still have to be incurred regardless of whether 1000 or 10000 manifolds are produced. This does not mean those costs that will continue to be incurred if we shut down production for manifolds and outsource.

This is an important distinction for our classification given below: 1500, 5000, 8000, 9000, 11000, 14000 Note: All costs are variable in the long run Avoidable Costs We have taken avoidable costs to mean those costs that can be avoided if a certain action is undertaken. In our case that action is the outsourcing of Manifolds. Except for 8000 and 11000 all other costs are avoidable to an extent because they are related to a certain minimum level of the production activity. Even 8000 is avoidable given a sufficient period of time or sale of equipment. As for 11000, it includes components like engineer salary and rearrangement costs that are avoidable) Direct labor and direct material for manifolds is avoided (also the associated 12000) 2000- cost production supplies for manifolds is avoided 3000- cost of wearing tools used for manifolds is avoided 4000- cost of utilities used for manifold production are avoided 9000- constant personnel related expenses where personnel are fired if Manifolds is outsourced. 500, 1000, 5000, 14000 – cost of personnel that will be fired if action taken is avoided Note: A look at Exhibit 2 showed a fall in all overhead accounts after the outsourcing in 1989. We can take this to mean that in reality no costs are completely avoidable or unavoidable. To Outsource or not to Outsource We are not in favor of outsourcing manifolds because of the following reasons: 1. The outsourcing of Muffler/Exhaust and Oil Pans, increased the OVH rate from 434% to 577% even though the total overhead amount fell. This new rate when applied to Manifolds made it cost inefficient despite some remarkable improvements in its production.

This was because the fixed costs associated with the production of Muffler/Exhaust and Oil Pans were transferred to the remaining product lines. 2. It is quite likely that if Manifolds are outsourced then the costs associated with their production will be added on to the remaining two lines. Their cost classification will suffer and they could be next in line for a possible outsourcing. The plant may eventually shut down and so may the company in time. 3. Though the data is absent we feel that the allocation base should be machine hours instead of direct labor.

This base should give a more accurate picture given the extensive mechanization of the plant and may provide some respite to the Manifolds operation in term of overhead cost allocation. 4. We have attempted a quantitive analysis of the effect of an outsourcing on the remaining lines. The results are given in the appendix. These were arrived at using a simple forecasting technique. The results are only meant to be illustrative and not accurate. We want to show how adversely the remaining lines could be effected if Manifolds is outsourced. **** APPENDIX | | | | | | |Projection | | | | |% of | | | |with Manifolds |w/o Manifolds | | | | |Total | | | | | | | | |1987 | |1988 |1989 |1990 |1991 |1991 | |Sales | | | | | | | | | |Fuel Tanks | $ 70,278 |21% | $ 75,196 | $ 79,816 | $ 83,535 | $ 87,223 | $ 87,223 | | |Manifolds | $ 79,459 |24% | $ 84,776 | $ 89,323 | $ 93,120 | $ 96,888 | $ – | | |Doors | $ 41,845 |13% | $ 45,174 | $ 47,199 | $ 49,887 | $ 52,128 | $ 52,128 | | |Muffler/Exhausts | $ 62,986 |19% | $ 66,266 | $ – | $ – | $ – | $ – | | |Oil Pans | $ 75,586 |23% | $ 79,658 | $ – | $ – | $ – | $ – | | |Total | $ 330,154 | | $ 351,071 | $ 216,338 | $ 226,542 | $ 236,239 | $ 139,351 | |Direct Material | | | | | | | | | |Fuel Tanks | $ 15,125 |12% | $ 15,756 | $ 16,312 | $ 16,996 | $ 17,499 | $ 17,499 | | |Manifolds | $ 31,696 |26% | $ 33,016 | $ 34,392 | $ 35,725 | $ 36,810 | | | |Doors | $ 14,886 |12% | $ 15,506 | $ 16,252 | $ 16,825 | $ 17,348 | $ 17,348 | |Muffler/Exhausts | $ 28,440 |23% | $ 29,525 | $ – | $ – | $ – | $ – | | |Oil Pans | $ 32,218 |26% | $ 33,560 | $ – | $ – | $ – | $ – | | |Total | $ 122,365 | | $ 127,363 | $ 66,956 | $ 69,546 | $ 71,657 | $ 34,847 | |Direct Labor | | | | | | | | | |Fuel Tanks | $ 4,169 |17% | $ 4,238 | $ 4,415 | $ 4,599 | 4,713 | $ 4,713 | | |Manifolds | $ 5,886 |24% | $ 6,027 | $ 6,278 | $ 6,540 | $ 6,715 | $ – | | |Doors | $ 2,621 |11% | $ 2,731 | $ 2,844 | $ 2,963 | $ 3,055 | $ 3,055 | | |Muffler/Exhausts | $ 5,635 |23% | $ 5,766 | $ – | $ – | $ – | $ – | | |Oil Pans | $ 6,371 |26% | $ 6,532 | $ – | $ – | $ – | $ – | | |Total | $ 24,682 | | $ 25,294 | $ 13,537 | $ 14,102 | $ 14,483 | $ 7,769 | |Overhead Rate | $ 4. 37 |  | $ 4. 34 | $ 5. 77 | $ 5. 63 | $ 5. 44 | $ 11. 4 | | |1000 | $ 7,713 | | $ 7,806 | $ 5,572 | $ 5,679 | $ 5,626 | $ 6,616 | | |1500 | $ 6,743 | | $ 6,824 | $ 5,883 | $ 5,928 | $ 5,906 | $ 6,313 | | |2000 | $ 3,642 | | $ 3,794 | $ 2,031 | $ 2,115 | $ 2,073 | $ 2,837 | | |3000 | $ 2,428 | | $ 2,529 | $ 1,354 | $ 1,410 | $ 1,382 | $ 1,891 | | |4000 | $ 8,817 | | $ 8,888 | $ 7,360 | $ 7,433 | $ 7,397 | $ 8,073 | | |5000 | $ 24,181 | | $ 24,460 | $ 20,063 | $ 20,274 | $ 20,169 | $ 22,096 | | |8000 | $ 5,964 | | $ 5,946 $ 3,744 | $ 3,744 | $ 3,744 | $ 4,771 | | |9000 | $ 6,708 | | $ 6,771 | $ 5,948 | $ 5,987 | $ 5,968 | $ 6,326 | | |11000 | $ 5,089 | | $ 5,011 | $ 3,150 | $ 3,030 | $ 3,090 | $ 4,000 | | |12000 | $ 26,936 | | $ 28,077 | $ 15,027 | $ 15,683 | $ 15,355 | $ 20,997 | | |14000 | $ 9,733 | | $ 9,784 | $ 8,025 | $ 8,110 | $ 8,068 | $ 8,853 | | |Total | $ 107,954 | | $ 109,890 | $ 78,157 | $ 79,393 | $ 78,775 | $ 92,774 | |Profit | $ 75,153 | | $ 88,524 | $ 57,688 | $ 63,501 | $ 71,324 | $ 3,962 | |Profit Margin |23% |  |25% |27% |28% | |- |For determining Direct Sales, Material and Labor, we calculated the average annual growth rate for each category using 1990 and 1987 date and | | |projected the 1991 figures using the 1990 values times the calculated growth rate. | |- |For determining the overhead costs we separated the fixed and variable component using the decrease of overhead as function of the decrease in | | |direct labor after removing Muffler/Exhausts and Oil Pans from production. Using these values we prorated the overhead cost with and without | | |Manifolds. | |- |We ignored inflation in the overhead cost from 1990 to 1991 | | | |

Cite this Bridgeton Industries Cost Analysis

Bridgeton Industries Cost Analysis. (2018, Jan 29). Retrieved from https://graduateway.com/bridgeton-industries-cost-analysis/

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