Bridgeton Industries: Automotive Component and Fabrication Plant

Bridgeton Industries

3. In calculating the expected gross margins as percentages of the respective selling prices for Products 1 and 2, we operated under the assumption that the “standard labor costs” consisted exclusively of direct labor costs. Therefore, they were included in the calculation of gross margin, as they make up part of Cost of Goods Sold.

Product 1: [62-(16+6)]/62= 64.5%

Product 2: [54-(27+3)]/54= 44.4%

4. Through analysis of the case description and its three Exhibits, we concluded that the costs reported by the cost system were inappropriate due to being incomplete, but not necessarily because they were wrong.

The primary issue we had with the information provided was that we were unable to do a differential analysis neither for the entire plant nor for individual products. Only with this information about differential costs and profits could we make informed decisions about how to deal with individual products, such as whether to terminate, continue without change, or outsource manifold production, for example. In order to do this, we would need to know the number of units sold that make up the selling prices recorded in Exhibit 2.

Another issue resulting from lack of cost data surrounds the determination of the allocation base. We are forced to accept the assumption made in the case (overhead allocated as a function of Direct Labor Dollars Spent) because we don’t know which products take more time to produce, which products require more skilled/higher paid workers, and which products tend to create the most utility costs. It is quite possible that Direct Materials or Direct Labor Hours would be more appropriate as overhead allocation bases.

5A. Table Illustrates Estimated Budgets for the 1991 Model Year at the ACF Plant with and then without the