Bridgeton Industries Case Write-Up

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

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

 (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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