Bridgeton should not outsource the manifolds in 1991. Even though ACF took the advice from the consulting firm, and outsourced Doors, Muffler and Exhausts in 1988, their business didn't get better. (Actually, their situation got worse). Their overhead rate in 1988 was 434%, and it became 577% in 1989 and 563% in 1990. ACF's direct labor cost was reduced 46% (from $25,294 to $13,537) however, ACF's overhead cost was reduced only 29% (from $109,890 to $78,157) This implies that the burden for producing one product has increased after starting the outsourcing of Muffler, Exhausts, and Oil pans. If ACF outsource another product, same situation will happen again. The reduction rate of overhead cost can't catch up the reduction rate of direct labor cost, resulting the increase of production cost.
Existing cost system has failed in the 1980's, because it didn't reflect the complexity of the products they produce. Existing cost system has overhead allocation based on direct labor hours, machine hours, and materials cost. This overhead allocation was too simple, and it ignored many factors such as the automation of the machines, and different volumes of the each product. As a result, JDCW failed to win the internal bidding, ending with the good result of low volume products only.
Cost of Product A103 : Direct Labor cost ($2.36 (0.185 labor hours * 12.76/hr)) + Direct Materials ($6.44) + Overhead cost (Direct Labor Overhead cost ($4.84 (2.05 * 0.185 labor hours * 12.76/hr)) + Machine Hours Overhead cost ($8.54 (27.56 * 0.310)) = $22.18
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