Birdgeton Case

Memorandum To Mike Lewis From Overseas Consulting Group fight December 9th 1990 Subject Manifolds Retention vs. Outsourcing Analysis Our team up of financial analysts has taken an in depth look at the consultants tribute to potentially outsource the obscure harvest-feastion bankers bill. Through our analysis you bequeath front that the consultants fuck off not considered the full financial impact that this outsourcing would have on the play along. This is likely because the recommendation has not taken into consideration the drop of make ups affecting Bridgeton industries.Through our analysis it becomes clear that the decision to retain the manifold toil line will be more financially dependable to the caller-up. We will begin with most of the assumptions of our analysis, and the conclusions from our various analyses of Bridgeton Industries Costs. Please refer to the wedded excel file for detailed analysis of the numbers. We know that Bridgeton uses an absorption ad dress system which does not easily distinguish between fixed and unsettled prices.The bother with that system makes it very challenging to forecast appropriately the exist of excess capacity and furthermore the impact of outsourcing the manifold production line. and so the reported lives argon not appropriate for this type of analysis. Our team began our own analysis of the cost to evaluate the recommendation. We began by calculating rough bank for each product, by first identifying how much operating expense should be allocated to each category. We broke out the strike by using civilize restriction (DL) as a % since most of the bash accounts atomic number 18 advertize related.As a result, viewgraph allocation for each product in 1987 is the following(a) Fuel Tanks 17%, Manifolds 24%, Doors 11%, Muffler/Exhausts 23%, and petroleum Pans 26% for 1987. Muffler/Exhausts, manifolds and Oil Pans atomic number 18 both labor intensive, so under this method, they bear a hig her percentage of the overhead costs. like a shot that Bridgeton stopped producing Muffler/Exhausts and Oil Pans, the manifold line carries an even greater proportion of the overhead costs of 46%. Therefore, the cost per manifold goes up because of the larger share of overhead it has to absorb.Please refer to the analysis file, tab 2 for 1991 forecasts. We assumed the sales and costs for each category would accession refinement to the same percentage as previous year. The overhead forecast take greater detailed analysis. The question is how to anticipate how much overhead would go down due to discontinuation of manifolds. In 1989, DL and subscribe to temporal (DM) went down 46% and 47% respectively from the outsourcing of the other production lines. If manifolds were to be outsourced and all DL and DM were eliminated, then we are looking at approximately 44% mitigate in DL and 49% decrease in DM.We assumed for the purpose of our analysis, that the drop-offs in DL and DM for these both year are comparable. Thus, we applied the same percentage of overhead reduction in each account to the 1989 to the 1991 overhead accounts. one time we established these overhead accounts, we then analyzed how the costs are allocated across the remain lines. As you can see in detailed spreadsheet, the most profitable product, the evoke tanks, now has to absorb 61% of the overhead cost and its gross margin is down to 33% from 43%. The doors gross margin also went sec from 27% to 17%. intelligibly the fixed costs, which werent removed with the outsourcing, have gnaw at the profitability of all of the remaining products. The consultants suggestion to outsource production is actually not a good option after(prenominal) all. Fix costs embedded in the cost per unit wint go away because less profitable parts are outsourced. If Bridgeton industries wants to seriously considering outsourcing the manifold line or any other some significant overhead restructuring is necessar y to try and overcome the fixed cost profitability dilution. Changes to cost structureAs we mentioned previously Bridgeton currently uses a single overhead pool for the entire plant that allocates costs based on put labor hours. Since the production process of the various product lines vary greatly, this causes the overhead allocation to be in straight. The products have different levels of automation and manual employ (refer to descriptions in exhibit 1). While one product line whitethorn be diligently working to reduce costs, another product line can simply reduce production and receive the same congress decrease in overhead costs.Also, the overhead percentage is calculated exclusively once a year at budget time and is use throughout the entire model year. With an annual calculation, there is little to no incentive for employees to continuously reduce their costs month to month. Bridgeton should recalculate the overhead percentages on a monthly basis to be more accurate if po ssible. We recommend creating multiple overhead pools by taking the overhead cost elements and assigning them to the product lines that are truly driving those expenses (basically link overhead to the product).Having a product specific allocation of OH expenses will allow centering to have better visibility to the product cost reduction efforts of the employees. changeable Costs, Fixed Costs & Excess Capacity Ultimately the fuss Bridgeton is facing is related to fixed costs due to excess capacity. Once production lines are outsourced, the remaining fixed costs in OH which are not outsourced represent the excess capacity. This is a cost problem for the company as the other products must absorb this. The two obvious solutions to this problem are to cut these costs as much as possible.Through close initiatives this can be made possible. The other solution would be to increase demand of existing product lines. In the case of Bridgeton industries there is a need for a strategic sh ift to increase that demand. Continuing cost reduction initiatives are necessary, but a strategy to differentiate Bridgetons products through quality, reliability, service, etc. could help increase demand and furthermore reduce the impact of excess capacity costs. Additionally if new overhead pools are created, as we recommended above, management should set standards for the activity on each product line.This will help control variable costs and keep the lines accountable for their own expenses. Supplies and small tools should only be purchased as need and overtime hours should be kept to a minimum. Fixed costs are engrossed evenly by each line, but can still be reevaluated by management. For example, a fixed asset audit can be performed to ensure that all assets that are being depreciated are truly in-service. work up the OH Rates The 1987 overhead rate used in the study was 435% of direct labor dollar costs. Bridgetons actual rate was 437% that year. smash rates for the remaini ng years are calculated below (OH / DL) As you can see the overhead rate for 199, which would be 752% without manifolds, is severely detrimental to the company financially. Clearly the consulting firm did not factor in the fixed costs associated with production when recommending the outsourcing of the manifold production line. Our conclusion is to continue producing manifolds going forward, and to adjust our cost reporting structure to better be able to analyze future day strategic shifts such as outsourcing a product line.As a company if Bridgeton does not do a better job to understand the costs of the vexation, it will be very challenging to make the best business decisions in the long run. Calculations GM% = (Sales Direct framework Direct Labor Overhead) / Sales ware GM% = (Product Sales Product DM Product DL Product Overhead) / Product Sales Product Overhead = Dept Overhead * DL Rate for product Product Costs = Direct Material + Direct Labor + Overhead DM Rate (Direct Material / lend Direct Material) DL Rate (Direct Labor / Total Direct Labor)