Bridgeton

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 Question1:

1. The strategic analysis conducted by the consultants did achieve its objective of classifying the products in terms of competitive position and potential. Four metrics quality, customer service, technical capability and cost were used to classify the products. Although these metrics completely captured the competitive position and potential of a product, the data used for this strategic analysis, especially the overhead cost seems to be based on incorrect cost allocation method. Bridgeton had a single plant wide overhead pool and a single allocation base that was the direct labor costs. This cost accounting is flawed because the plant had product diversity and the overhead cost structure assumed that all overheads are driven by direct labor.  This kind of accounting will over cost labor intensive and high volume products and under cost the less labor intensive and low volume products. So this flawed cost allocation method might have created distortions and could have led to wrong classification of the products.

• Outsoucrcing will help companies to focus more on their core businesses while giving out the less important and non-core work to outside vendors.
•  Reduces labor and operational costs
• By outsourcing firms can use outside resources that might have access to top class technologies. This can help increase the quality of the product and also reduce the time taken to complete the product
• Internal company resources will be freed up after outsourcing and can be better utilized by putting it to other tasks that are more profitable.

Question2:

    a.  

1. If overhead costs were entirely fixed costs then there would be no savings     in outsourcing. All the fixed costs will still have to be borne by Bridgeton to operate the plant to produce the remaining product lines.

1. In 1989, the total direct labor cost reduced by 46.5% from the previous year. Now assuming that the overhead costs directly vary with direct labor costs, the overhead cost in 1989 should actually be $109,890*(1-0.465) = $58,791.

Now taking the difference between the 2 years, we get a total savings of  $51,099 ($109,890 - $58,791)

b. Looking at the year 1988, the rounded overhead allocation rate is 435%. So the                    consultants might have thought that about 435% of the direct labor costs of both muffler and oil pans would be saved by outsourcing. The direct labor costs for the year 1988 for both muffle and oil pans were $5766+$6532 = $12,298. 435% of this value is $53,496. The consultants estimated a savings of 53,496 dollars.

c.  

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Total savings in direct labor cost: $11,757

Total savings in overhead cost: $31,733

So percentage savings: (overhead savings)/(direct labor savings) = 270%

Question3:  

I calculated the percentage difference in the labor costs from year 1988 to 1989. This comes close to 46.48% ((25294-13537)/25294). Similarly, calculated the percentage difference for each of the overhead account numbers for the same years.

1000- wages of Janitors and truck drivers

Percentage Change: 28.62%

Cost Type: Mixed

Fixed component might include wages of Janitors and variable component might include the wages of truck drivers.

1500- all plant salaried personnel expense

Percentage Change: 13.79%

Cost Type: Fixed

Very less percentage change when compared to change in labor costs. So most likely fixed. Wages are normally fixed unless it is direct labor costs.

2000- production supplies such as gloves and packing material

Percentage Change: 46.47%

Cost Type: Variable

Direct linear variation with labor costs as the percentage change is the same.

3000- tools such as hammers, gloves and screwdrivers

Percentage Change: 46.46%

Cost Type: Variable