Conclusion for Bridgeton
Conclusion
As with all failures the problems can be viewed from the inappropriate model for the strategic analysis. To understand the root cause of problems, we calculate the overhead allocation rate for each of the model years from 1988 through 1990:
1987
1988
1989
1990
OH Rate
435%
435%
575%
565%
It can be seen from the table that, after outsource of Muffler-exhaust systems and oil pans, the overhead rate was dramatic increase from 435 % in 1988 to 575% in1989. The overhead costs went from 109,890 in 1988 to 78,157 in 1989, finding a 28.88% reduction. But at the same time, the direct labor went from 25294 in 1988 to 13,537 in 1989 with 46.48% reduction. Obviously, there was a significant reduction in direct labor within these two years when there was no obvious change in overhead costs.
According to the case, the decision to outsource Muffler-exhaust systems and oil pans was based on the model without overhead allocation. Overlooking the overhead allocation represented a nightmare in analysis and led Bridgeton face falling profits.
To further explore the problems, we allocate overhead costs into each products for getting the true profits and the ROS:
Profit By Segment
1987
1988
1989
1990
Fuel Tanks
32,849
36,767
33,703
35,956
Manifolds
16,273
19,516
12,555
13,904
Doors
12,937
15,057
11,750
13,358
Muffler/Exhausts
4,399
5,893
-
-
Oil Pans
9,283
11,152
-
-
Return on Sales
1987
1988
1989
1990
Fuel Tanks
47%
49%
42%
43%
Manifolds
20%
23%
14%
15%
Doors
31%
33%
25%
27%
Muffler/Exhausts
7%
9%
0%
0%
Oil Pans
12%
14%
0%
0%
The ROS about all of the products reduced significantly from 1988 to 1989. So we use the variable overhead and the variable direct labor between these two years as the typical basis to calculate the Fixed overhead:
Variable Overhead Rate= (109,890-78157)/(25294-13537)=270%
Fixed Overhead= 109,890-25,284*270%= 42,000
Bridgeton wanted to lower
As with all failures the problems can be viewed from the inappropriate model for the strategic analysis. To understand the root cause of problems, we calculate the overhead allocation rate for each of the model years from 1988 through 1990:
1987
1988
1989
1990
OH Rate
435%
435%
575%
565%
It can be seen from the table that, after outsource of Muffler-exhaust systems and oil pans, the overhead rate was dramatic increase from 435 % in 1988 to 575% in1989. The overhead costs went from 109,890 in 1988 to 78,157 in 1989, finding a 28.88% reduction. But at the same time, the direct labor went from 25294 in 1988 to 13,537 in 1989 with 46.48% reduction. Obviously, there was a significant reduction in direct labor within these two years when there was no obvious change in overhead costs.
According to the case, the decision to outsource Muffler-exhaust systems and oil pans was based on the model without overhead allocation. Overlooking the overhead allocation represented a nightmare in analysis and led Bridgeton face falling profits.
To further explore the problems, we allocate overhead costs into each products for getting the true profits and the ROS:
Profit By Segment
1987
1988
1989
1990
Fuel Tanks
32,849
36,767
33,703
35,956
Manifolds
16,273
19,516
12,555
13,904
Doors
12,937
15,057
11,750
13,358
Muffler/Exhausts
4,399
5,893
-
-
Oil Pans
9,283
11,152
-
-
Return on Sales
1987
1988
1989
1990
Fuel Tanks
47%
49%
42%
43%
Manifolds
20%
23%
14%
15%
Doors
31%
33%
25%
27%
Muffler/Exhausts
7%
9%
0%
0%
Oil Pans
12%
14%
0%
0%
The ROS about all of the products reduced significantly from 1988 to 1989. So we use the variable overhead and the variable direct labor between these two years as the typical basis to calculate the Fixed overhead:
Variable Overhead Rate= (109,890-78157)/(25294-13537)=270%
Fixed Overhead= 109,890-25,284*270%= 42,000
Bridgeton wanted to lower