|SUBJECT: |Bridgeton Industries Case Study |
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In 1989 the company outsourced the production of the muffler/exhaust and oil pans. These products represented approximately 50% of the company’s direct labor costs, as shown in Appendix C. In 1990, the manifold product represents approximately 50% of the company’s direct labor costs, as shown in Appendix C. It can be assumed that a similar change in overhead allocation as seen from 1988 to 1989 would be seen from 1990 to 1991. If the manifold product is outsourced, the overhead will be reallocated to the remaining products, the fuel tanks and doors. As a result, these products will undergo a burden percentage of 706% per direct labor dollar, refer to Appendix B.

This analysis indicates that the product should not be outsourced, as a result of the contribution and ending profit. In addition, keeping the production of the manifolds in the facility allow for allocation of the company’s overhead over three products. This results in a lower production cost for each of the products.

Past history illustrates that the company outsourced the muffler/exhaust and oil pans despite the fact that their margins (not including overhead) were 47% and 50% respectively, as shown in Appendix B. The current product classification system is based on the product’s respective degree of cost competitiveness, not the product’s contribution margin. This classification system categorizes the manifolds as a Class