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 107954 24682 122365 330154 437%

1988 109890 25294 127363 351071 434%
1989 78157 13537 66956 216338 577%
1990 79393 14102 69546 226542 563%

88%
86%
117%
114%

33%
31%
36%
35%

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.
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.

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

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.

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%