Bridgeton Industries: Acf Case

Bridgeton Industries: ACF Case

As the technology changes, the way systems operate but advance as well. With the advances in manufacturing and shipping, international competition is growing more and becoming a larger problem for plants across the US. The Automotive Component & Fabrication Plant (ACF) has received a blow from the drop in demand and increase in supply. Their plant was deemed not cost competitive because of their traditional manufacturing ways. By further investigating the root of their high product costs, ACF was able to find ways to cut costs and make their products more cost competitive. Their fuel tanks were cost effective, but their muffler-exhaust systems and oil pans were designated to be outsourced. They were really worried about the manifolds, which could either improve in production and stay local, or could deteriorate and be outsourced. The following exhibits will show the cost breakdown of ACF and figure out the next best step in producing manifolds.

The consulting firm estimated the overhead rate to be 435% of each direct labor cost. The percentage seemed accurate for the years 1987 and 1988, as the overhead rate based on the model year budget were 437.4% and 434.5% respectively. However, the changes in the overhead allocation rate for the years 1989 and 1990 were significantly higher when compared with the 1987 rate, as it is shown in the Exhibit 1. One of the reasons to hold significantly higher rate was between 1988 and 1989 when the total overhead costs decreased at slower pace than direct labor costs, direct material costs and sales. In addition, as it is mentioned in the case, at the end of 1988 model year the oil pans and muffler exhaust systems were outsourced from the ACF. That was a major contributing factor to why direct labor costs and material costs decreased faster than the overhead, as it is shown in Exhibit 2.

The product costs reported by the cost system are appropriate for use in the strategic analysis for the years 1987 and 1988. The company's cost system produces manufacturing cost reports using the full factory costs. The product costs used in the study were taken from these manufacturing costs reports which were provided by the facility's financial personnel. These costs may not be relevant for the years following 1988, however. The reason for this is that when the Muffler/Exhaust line and Oil Pan line are dropped, the Direct Labor costs are nearly cut in half, yet the total overhead costs are decreased less than 1/3 of their previous cost, as seen in Exhibit 2. This causes the overhead allocation rate to increase over 100% from nearly 435% in 1988 to roughly 577% in 1989, as seen in Exhibit 1. While in theory this situation is possible, it does not make sense to continue to use direct labor costs as the overhead allocation rate factor.

Exhibits 3 and 4 show an important comparison dealing with two different selling prices and the related overhead allocation per unit. To find