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Bridgeton Case Study

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Bridgeton Industries Case write-up

3. In model year 1988, the overhead rate is 435% (per case), the gross margin as a percentage of selling price for product 1 is 22%, and for product 2 is 20%. In model year 1989, the overhead rate  = $79,393÷$14,102 = 563%; the gross margin as a percentage of selling price for product 1 is 10%, and for product 2 is 13%.[pic 1]

Table 1

Model Year 1988

Model Year 1990

Product 1

Product 2

Product 1

Product 2

Expected selling price

62

54

62

54

Standard material costs

16

27

16

27

Standard labor costs

6

3

6

3

Overhead costs

26.10 (6×435%)

13.05 (3×435%)

33.78 (6×563%)

16.89 (3×563%)

Cost of goods sold

48.10

43.05

55.78

46.89

Gross profit

13.90

10.95

6.22

7.11

Gross margin

22%

20%

10%

13%

4. (a) In the case, the cost analysis breaks each product cost into 3 elements: materials, direct labor and benefits, and overhead. The material costs and direct labor and benefits costs can be objectively measured and accurately traced to each product line, while the allocation of manufacturing overhead may be more arbitrary.  In this case, the plant applies overhead to products as a percent of direct labor cost.

To assess the appropriateness of the overhead costs, one approach is to analyze the overhead account. If a large portion of the overhead account is employee-related and affected by the wage rate (or seniority) of the employees, direct labor costs would be the better allocation base. Otherwise, direct-labor hours would be a better choice.  Per Table 2, manufacturing overhead is split almost equally between skill-based (57%) and non-skill-based overhead (43%); therefore, using direct labor cost as an allocation base for all manufacturing overhead may not be appropriate.

Table 2

Account number

Description

 Skill-based

 Non-skill-based

1000

Wages and benefits for nonskilled hourly personnel

 

 $         7,806

1500

All plant salaried personnel

 

 $         6,824

2000

Production supplies

 

 $         3,794

3000

Small wearing tools

 

 $         2,529

4000

All purchased utilities

 

 $         8,888

5000

Wages for non-production employees with specialized skill classification

 $       24,460

 

8000

Depreciation and property tax

 

 $         5,946

9000

Various relatively constant personnel-related expenses

 

 $         6,771

11000

Project expense for M&E

 

 $         5,011

12000

Benefits and overtime premium for production hourly works (wages included in direct labor)

 $       28,077

 

14000

Benefits for skilled hourly workers (wages included in account 5000)

 $         9,784

 

Total

 $       62,321

$       47,569

Percentage of total MOH

 

57%

43%

 (b) Overhead includes both fixed and variable components. When determining whether to outsource or drop any one of the product line in terms of product costs, fixed overhead is irrelevant and cannot be taken into consideration.

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