Bridgeton Industries Cost Analysis

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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. 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...
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