Automotive Component & Fabrication Plant

Bridgeton Industries:
Automotive Component & Fabrication Plant

Danwei Zhang

Jingyi Liu

Siyun Zhang

Yuxuan Xiao

3. Consider two products in the same product line:  
Calculate the expected gross margins as a percentage of selling price on each product based on the 1988 and 1990 model year budgets assuming selling price and material and labor cost do not change from standard.

Answer: 

[pic 1]

Overhead rate = overhead / direct labor

Gross profit = expected selling price - total cost

Gross Margin = gross profit / expected selling price

4. Are the product costs reported by the cost system appropriate for use in the strategic analysis?
Answer：

The product costs reported by the cost system is not appropriate for use in the strategic analysis.

Based on the product costs reported, at the end of the 1988 model year, ACF dropped Muffler-exhaust systems and oil pans lines, then the factory profit dropped from $88,524 in 1988 to $57,688 in 1989. (According to Exhibit 2)

The reason that can explain this trend is the fixed cost makes up a large part of total overhead. After dropping these two lines, ACF reduced direct cost and a little amount of overhead, but also lost sales revenue from these two products lines. Furthermore, the fixed cost (1000,4000,5000,8000,11000) allocated to these two products still existed and increased the cost of remaining manufacture lines.

Therefore, ACF should not use the cost system as the sole source in the strategic analysis to make strategic decisions.

 
5. Assume that the selling prices, volumes, and materials costs for the 1991 model year will not change for fuel tanks and doors produced by the ACF of Bridgeton Industries.  Assume also that if manifolds are produced, their selling prices, volume, material, and direct labor costs will not change.

  a.  Prepare an estimated model year budget for the ACF in 1991:
 (1)  If no additional products are dropped;
 (2)  If the manifold product line is dropped.
Explain any additional assumptions you make in preparing your estimated model year budgets.
Answer:  

We make the following assumptions:

1. The direct labor and overheads of 1991 are the same as those of 1990.

2. We classify the overhead accounts into fixed overhead and variable overhead.

Here is the explanation: The outsource of oil pans and muffler-exhaust systems only result in the reduction of production and skilled labor. Any overhead related to these two categories should be treated as variable overhead which will be reduced through outsourcing. Any other overhead such as non-skilled personnel and depreciation would not change, classifying as fixed cost.

Scenario 1

If no additional products are dropped, and the selling prices, volumes and material costs for the year 1991 remain unchanged, according to assumption 1, the budget for 1991 will be the same as that for 1990.

Scenario 2

If the Manifold product is dropped, the revenue, direct material and direct labor should be eliminated.

Meanwhile, variable overhead of Manifold products should be deducted from total overhead. Using the variable overhead allocation rate in question b, variable overhead of Manifold equals to 18195 (278.21%*6540). Therefore, the total overhead of scenario 2 is 61198(79393-18195)

b.  What will the overhead allocation rate be under the two scenarios?

Scenario 1

The overhead rate is same as it in year 1990, which is 563%.

Scenario 2

If Manifold is outsourced, the variable overhead of it will be deducted from total overhead. Based on figure from year 1990, variable cost constitutes 49.42% of total overhead. Therefore, the allocation rate of variable cost should be 278.21% (49.42%*563%), and that of fixed cost should keep same as 563%.

Appendix