Bridgeton Case

Bridgeton Exam Case Questions

1. The overhead allocation rate used in the 1987 model study at the ACF was 435% of DL cost. Calculate the overhead allocation rate using 1987 model year budget. Why do you get different numbers? Now calculate the overhead allocation rates for 1988—1990. Are the changes significant and why have these changes occurred?

Some of the direct costs may be classified as the overhead costs.

Model year | 1987 | 1988 | 1989 | 1990 |

Direct labor cost | $122,365 | $127,363 | $66,956 | $69,546 |

Overhead cost | $107,954 | $109,890 | $78,157 | $79,393 |

Overhead allocation rate | 437% (vs. 435%) | 434% | 577% | 563% |

Figure 1

Yes, the changes in the overhead allocation rate from 1988 to 1990 are significant. After oil pans and muffler-exhaust systems had been outsourced, the ACF were able to eliminate the direct labor cost by reducing 46% direct labor cost from 1988 model year to 1989 model year, but were not able to reduce the overhead costs proportionally (only 29% decrease) as shown in Figure 1. This resulted in an increase in the overhead allocation rate.

2. Consider two products in the same product line.

| Product 1 | Product 2 |

Expected Selling price | $62 | $54 |

Standard material cost | 16 | 27 |

Standard labor cost | 6 | 3 |

Calculate the expected gross margin %s on each product based on 1988 and 1990 model year budgets, assuming labor and material costs do not change. Are the products reported by the cost system appropriate for use in the strategic analysis?

 Model Year | 1988 | 1990 |

  | Product 1 | Product 2 | Product 1 | Product 2 |

Selling price | $62 | $54 | $62 | $54 |

Standard material cost | $16 | $27 | $16 | $27 |

Standard labor cost | $6 | $3 | $6 | $3 |

Overhead | $26.07 | $13.03 | $33.78 | $16.89 |

Total costs | $48.07 | $43.03 | $55.78 | $46.89 |

Gross margin | $13.93 | $10.97 | $6.22 | $7.11 |

Gross margin % | 22.47% | 20.31% |...