ANALYSIS OF BRIDGETON INDUSTRIES: AUTOMATIVE

COMPONENT & FABRICATION PLANT

ANALYSIS OF BRIDGETON INDUSTRIES: AUTOMATIVE
COMPONENT & FABRICATION PLANT

Submitted to
Khairul Alam Siddique
Lecturer
Department of Finance,
Faculty of Business Studies,
University of Dhaka.

Submitted by
Group no: 1
Section: B, 23rd Batch
Department of Finance,
Faculty of Business Studies,
University of Dhaka.

Date of Submission: 03.08.2019

 Group list

Serial No Name Roll Marks

obtained
01 Md. Touhid Hasan 23-066
02 Najia Jahan 23-127
03 Md. Ohidur Rahman 23-158
04 S M Rashidul Hasan Rana 23-318
05 Nur Taslima Jannat Swarna 23-417
06 Masud Rana 22-168
 Letter of Transmittal

July 21, 2019

Khairul Alam Siddique

Lecturer,
Department of Finance,
Faculty of Business Studies,
University of Dhaka.

Subject: Submission of the report on “ANALYSIS OF BRIDGETON INDUSTRIES: AUTOMATIVE

COMPONENT & FABRICATION PLANT”

Dear Sir,

It is a great pleasure for us to submit the report on “Analysis of Bridgeton industries: Automative
component & fabrication plant””. Which is prepared as a fulfillment of the requirement of the
course named “Managerial Accounting” (F-302)” of BBA program under ‘Department of Finance’
of the Faculty of Business Studies, University of Dhaka.

This study has given us the opportunity to analyze the sales, material and labor cost and what
are the relationship the falling of sales and overhead. We analyze whether the decision of
Bridgeton Industries to products outsourcing is effective or not. Here we also try to evaluate that
whether Engine Plant Shutdown by the Bridgeton industries was right or wrong.

We would like to convey us special thanks and gratitude to you for patronizing our effort & for
giving us proper guidance and valuable advice. You will be delighted to know that, we have tried
our best to make this report more & more informative and factual.

Sincerely Yours,

Md. Ohidur Rahman

On behalf of
The Group: 1
 Table of Contents

Executive Summary ................................................................................................................................. 1

Chapter 1: Introduction ........................................................................................................................... 2
Chapter 2: Case Overview........................................................................................................................ 3
Chapter 3: Analysis of Overhead Allocation ............................................................................................. 4
Chapter 4: Calculating the expected gross margins as a percentage of selling price ................................. 6
Chapter 5: Preparing an estimated model year budget for the ACF...………………………………………………………7
Chapter 6: Conclusion…………………………………………………………………………………………………………………….……....9
 Executive Summary
For our project we analyze the given case and use knowledge gathered from our Managerial
Accounting for our analysis. In our project we try to show whether the changes since 1987 in
overhead allocation rates significant? And why have these changes occurred? Using the equation:
Overhead Allocation Rate = overhead for period / allocation base for period and Allocation Bases
of Direct labor dollars, direct labor hours, machine hours, direct material dollars, etc. These give
us a lots of information about the Bringeton industries happenings and the reason behind these.
Our Project is divided into six major parts, which are Introduction Part, Case Overview Part,
Analysis of Overhead Allocation, Calculating the expected gross margins as a percentage of selling
price, preparing an estimated model year budget for the ACF and Conclusion.
Chapter one describes the introduction of our report, background of the study, objectives, scope
and limitations of the study.
In chapter two, we tried to describe in brief an overview the case Bridgeton industries:
automative component & fabrication plant
Chapter three consists of Analysis of Overhead Allocation and reason behind the changes in
overhead cost.
Chapter four includes the calculation of the expected gross margins as percentage of sells 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.
In Chapter five Here we prepare an estimated model year budget for the ACF in 1991 and
determine the overhead allocation rates be under the two scenarios. For instance there is no
additional products are dropped, and the selling prices, volumes, and material costs will be the
same as in model year 1990 for fuel tanks, doors and manifolds. Another one is manifold product
line is dropped, but the selling prices, volumes, and material costs will be the same as in model
year 1990 for fuel tanks, and doors...
In chapter six we make a conclusion and show the factors which are responsible for the decrease
in profit and whether the whole decision taken by the industry is effective or defective.
We have tried our best to accumulate relevant information in this report and make the report
vivid and comprehensive within the scheduled time and limited resources.

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 Chapter 1: Introduction
Throughout the 1980s, the ACF experienced serious cutbacks due to this competitive pressure.
However, as the 1990 model year budget approached, the ACF was still considered a critical plant.
Model years ran from September 1 to August 31 and were the bases for planning and budgeting.
The model year running from September 1, 1989, to August 31, 1990, was designated the 1990
model year. Production contracts were usually awarded for a model year. During the 1987 model
year, Bridgeton Industries hired a strategic consulting firm to examine all of Bridgeton's products
and classify them in terms of "world-class" competitive position and potential. Four criteria were
considered: (1) Quality, (2) Customer service, (3) Technical capability (engineering and
sophistication of plant processes), and (4) Competitive cost position. The data used to evaluate
quality included warranty failure rates, product rejects per million, percent scheduled
maintenance versus breakdown maintenance, customer complaints per million, and published
user rating service scales.
To evaluate customer service, in addition to interviews, the study examined percent on-schedule
production and shipments, percent variation in these schedules, time response to requests for
information, time response to customer complaints, lead time from design of concept to
production of product, and degree of manufacturing flexibility.
Technical capability was largely estimated by interviewing customers. Internal data were
gathered about product feature innovations, degree of technological proprietary, and depth of
engineering expertise.
Competitive cost position was evaluated by interviewing financial, purchasing, and engineering
personnel, and by undertaking a cost analysis that examined the cost of production by breaking
each product cost into three elements: materials, direct labor and benefits, and overhead. The
product costs used for the study were total full factory costs based on examination of the
manufacturing cost reports generated by the facility's cost systemThe budgeted unit costs
provided by the plant for the 1987 model year study included overhead (burden) applied to
products as a percent of direct labor dollar cost.
product costs were analyzed by the consultants to classify products by degree of cost
competitiveness. Product classification was finished and reviewed at the corporate level with
little plant adjustment or involvement after initial data collection. Products classified as world-
class (having costs equal to or lower than competitors' manufacturing costs) were considered
Class I. Products that had the potential of becoming world-class (having costs 5% to 15% higher
than competitors' costs) were classified as Class II. Products that had no hope of becoming world-
class (having costs more than 15% higher than the major competitor) were classified as Class III.
The other criteria (quality, customer service, and technical capability) were weighted into a
factor that determined the final classification of the products.

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 Chapter 2: Case Overview
The Automative Component and Fabrication Plant (ACF) is part of Bridgeton Industries. They
supplied Components to the Big-Three domestic Automobile plants. During the 1980’s ACF
experienced Cutbacks due to foreign Competition. In 1987 Bridgeton Industries hired a strategic
consulting firm which determine the potential of the remaining production at ACF.
After Analysis, the consulting firm suggested that muffler-exhaust system and oil pans
components should be outsourced, and the production of manifolds should be watched for either
improvement or decline. In 1990, after a period of observation the consulting firm suggested that
manifold production should be considered a candidate for outsourcing. We are reviewing the
information used by the consulting firm to determine if the production of manifolds should be
outsourced.
The consulting firm estimated that overhead should be allocated to products at 435% of each
product’s direct labor cost. This percentage seemed accurate in 1987 and 1988, as the overhead
rates were 437% and 434%. However, this did not hold true after products were discontinued in
1989. At 435% direct labor, we would have expected overhead to decrease by about $53,450, or
48%. The actual decrease in overhead, however, was only $31,733, or 28%.
In 1989 the overhead rate was 577%, and in 1990 it was 563%. This indicates that the direct labor
allocation rate used is not a sufficient way to assign overhead to products. Between 1988 and
1989 total overhead cost decreased at a slower rate than DMC, DLC, and sales did.

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 Chapter: 3 Analysis of Overhead Allocation

Let’s analysis the problem:

To do this we need to analyze the Overhead Rate. Here, Equation: Overhead Allocation Rate =
overhead for period / allocation base for period
Allocation Bases: Direct labor dollars, direct labor hours, machine hours, direct material dollars,
Overall sells

Year OH DLC DMC Sales OH/DLC OH/DMC OH/Sales

1987 $107,954 $24,682 $122,365 $330,154 437% 88% 33%

1988 $109,890 $25,294 $127,363 $351,071 434% 86% 31%

1989 $ 78,157 $13,537 $ 66,956 $216,338 577% 117% 36%

1990 $ 79,393 $14,102 $ 69,546 $226,542 563% 114% 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.
Changes in the Overhead Cost, Direct Labor Cost, Direct Material Cost and Sales are shown below

Year % Change in % Change in % Change in Direct % Change in

Total Overhead Direct Labor Cost Material Cost Sales
1987 0 0 0 0
1988 1.80% 2.48% 4.08% 6.33%
1989 (28.88%) (46.50%) (47.43%) (38.38%)
1990 1.60% 4.17% 3.87% 4.71%

The company has outsourced these products because they are classified as class III products as
per the evaluation criteria of the company.

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This outsourcing resulted in declining sales as well as cost of the company. Because of
outsourcing the direct labor cost for the model year 1990 has been decreased by 46.50%
approximately as compared to last year, whereas, the total overhead cost for the model year
1990 decreased by approximately 28.88% as compared to previous year.
The total overhead cost acts as a numerator and total labor cost for the year acts as a
denominator while calculating overhead rate as a percentage of direct labor. Thus, greater
decrease in denominator as compared to numerator caused the overhead rate increase
drastically.

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 Chapter: 4 calculating the expected gross margins as a
percentage of selling price

Here we calculate the expected gross margins as percentage of sells 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.
To do this we the Equation here is: Gross margin = sales revenue – cost of goods sold
Again 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.

Product1 Product 2
Year 1988 1990 1988 1990
Expected selling Price 62 62 54 54
Standard Material Cost 16 16 27 27
Standard Labor Cost 6 6 3 3
Overhead Allocation Rate(OAR) 434% 563% 434% 563%
Overhead(OAR*DLC) 26.04 33.78 13.02 16.89
Gross Margin on Sales of one Unit 13.96 6.22 10.98 7.11
% of Gross Margin on Sales 22.51613 10.032258 20.33333 13.166667

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.

6
 Chapter 5: Preparing an estimated model year budget for the
ACF
Here we prepare an estimated model year budget for the ACF in 1991 and determine the
overhead allocation rates be under the two scenarios.
There is no additional products are dropped, and the selling prices, volumes, and material costs
will be the same as in model year 1990 for fuel tanks, doors and manifolds.
The manifold product line is dropped, but the selling prices, volumes, and material costs will be
the same as in model year 1990 for fuel tanks, and doors.
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: 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.

Year Overhead Direct Labor

Cost
1988 109890 25294
1989 78157 13537
Change 31733 11757
∆OH/∆DLC= 2.699072893

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Assumption 2: Given that DLC for manifolds in 1990 was 6,540 and these will all go away in 1991
if manifolds are dropped, 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%
Exhibit 3 depicts that, in scenario 1, the company will earn higher net profit. Since the company
is trying to maintain the cost efficiency in its operations, so it is assumed that the company is
making effective strategies which is decreasing the overall cost of the operations of the company.
Keeping this view in mind, it is wise to assume that the overhead costs are decreased in the model
year 1991, as compared to the overhead costs of model year 1990.
Thus, decrease in overhead costs has increased the profit of the company for the model year
1991 as compared to the profit in the model year 1990. Not only, are the profits increased but
also, the overhead absorption rate is also decreased for the model year 1991.

8
 Conclusion
In 1991, it is likely that outsourcing manifolds will result in costs savings based on direct labor
and direct material costs. However, the drop in profits is likely to be larger on a percentage basis.
This means we would be killing profits at a faster rate than we would be saving money.
Additionally, the case mentions that increased emissions standards could result in new
requirements for the types of manifolds produced by Bridgeton. This would increase demand for
these parts and could also increase the sales price of the manifolds.
In order to make an intelligent decision about outsourcing the manifold production process, all
costs and the resultant savings from dropping these costs must be accounted for. A differential
analysis of the manifold production process would give this sort of information and allow for the
best decision. It would be wise not to base decisions on a single overhead pool but to more
granularly determine the costs for each product line. This would give management the right
information to make the correct decision.
The product costs and cost system used were probably not appropriate to use for strategic
planning after muffler-exhaust systems and oil pans were outsourced. As we saw from the
overhead estimates, allocating overhead to the correct product is important in order to
understand the profitability of each product. The current system lumps all overhead into one
category. The overhead cost should be traced and allocated to each product when appropriate.
Also, common costs should not be allocated to individual products, especially if the cost won’t
disappear if the product is outsourced. We need a better break down, because when saw when
total overhead cost decreased at a slower rate than everything, this might be an indicator that
we need a more efficient most measurement.
Based on our projections we recommend keeping manifold production at the ACF. There are
many potential benefits for doing this. The production of manifolds is highly automated. If the
sale of manifolds increases, due to new emission standards, production can be increased at
insignificant increases to direct labor. Even though when mufflers and oil pans were outsourced
and our total overhead fell, our overhead allocation rate increased from 34% to 577%This is
because the fixed cost from muffles and oil pans where transferred to the remaining product
lines. We also assume this will remain true if manifolds are outsourced and it too will also increase
the allocation rate.
Finally the consulting firm’s overhead cost allocation method did not work, possibly because they
allocated common costs into product segments. After the products were discontinued, the
common costs remained and were then spread between the remaining products. The consulting
firm’s methods resulted in their recommendation to outsource manifold production, a product
that we feel can be profitable for the company, especially if sale volumes and prices can increase
due to new demand. In order to get more accurate cost information, we recommend ACF revise
their cost system. It is important to keep product costs associated with the correct products. It
is also necessary to not associate any common cost with specific products.
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