Automotive Component & Fabrication Plant
The Automotive Component and Fabrication Plant (ACF) was the original plant site for Bridgeton Industries, a major supplier of components for the domestic automotive industry. It manufactured fuel tanks, manifolds, doors, muffler/exhausts and oil pans. All its products were sold to Big Three domestic automobile manufactures. Competition was from local suppliers and other Bridgeton plants. The plant well grew and developed as far as the market dominated by U.S automobile manufactures. It became less effective when foreign competition and scarce, expensive gasoline caused domestic loss of market share. Throughout the 1980s, the ACF experienced serious cutbacks due to this competitive pressure. The critical issues of drop off one or more products made ACF have to seriously analyze all the cost effectiveness of each product. Step by step, all the issues will be considered before the final recommendation is made. (Question 1) First, we go back to the year 1987, two years before the two products of Mufflers/Exhausts and Oil Pans were dropped. The overhead allocation rate of 435% to the direct labor was applied to each product. We allocated the OH of fuel tanks, manifolds, doors, Muffler/exhausts and oil pans were $18,135; $25,604; $11,401; $24,512 and $27,714. It made the total of OH $107,367 (see table 1). These numbers were only the estimated numbers for the estimated budget year 1987 and that is why it was slightly different from the real OH raising through the real activities (see exhibit 2) of $107,954. (Question 2) Similarity, we can easily calculate the overhead allocation rate to labor cost for the year 1987, 1988, 1989 and 1990. Comparatively, they will be 437%, 434%, 577% and 563% (See table 2a). It was very clear that 1988 was not significantly changed but the year 1989 and 1990 were dramatically changed in comparation with the year 1987 because in these 2 years, two products of Muffler/Exhausts and Oil Pans were dropped. After dropping 2 products, the total overhead cost decreased slower than the direct labor cost, the direct material cost and sales (see table 2b). (Question 3) The decision of dropping 2 products of Muffler/Exhausts and Oil Pans in 1989 would come to a lot of change in total product cost but more significantly, it drove to the change of the gross margin 1989 in comparation with 1988. The reason for that was because the overhead allocation rate went up dramatically from 434% in 1988 to 577% in 1989 (see table 3). It made the overhead cost for each product in 1989 was much higher than it was in 1988. It drove to the gross margin for both two products were much lower in 1989 which were $5 for product 1 and $7 for product 2 in comparation to $14 for product 1 and $11 for product 2 in 1988 (see table 3). Is also drove to the per sales for both two products were much lower in the year 1989 which were 9% for product 1 and 12%for product 2 in comparation with 23% for the product 1 and 20% for product 2 in 1988 (see table 3). (Question 4) It is very clear that the product costs reported by the cost system are not appropriate for use in the strategic analysis. The decision of dropping 2 products of Muffler/Exhausts and Oil Pans in 1989 was based on this analysis. If the report is accurate, after dropping these two products it will help the gross income go up. But in contrary, after dropping of 2 products, the income was going down from $88,524 in 1988 to $57,688 in 1989 (see table 2a). The un-appropriation is that their allocation of the overhead for each product only bases on the rate of the direct labor cost. Meanwhile, the overhead will depend on a lot of other items such as fix cost, direct material… They should you the ABC method to allocate the overhead and calculate the total cost of each product. (Question 5) After dropping 2 products in 1989, after 2 years, the total gross income of the company did not go up but go still...
Please join StudyMode to read the full document