Bridgstone Industries
During the 1988/89 year, the consultants downgraded manifolds to Class III (from Class II), indicating that they should be outsourced. Describe, as precisely as you can, why you believe manifolds appeared less profitable in 1988/89 than in 1987/88. Be sure to describe how Bridgeton calculates costs (which largely determine the consultant's classification), and which accounting and operational decisions led to the downgrading.
Based on the evaluation of costing and accounting techniques used it is believed that the manifolds appeared to be less profitable in 1988-89 compared to 1987-88 primarily due to the following:
A comparison of the net profit and total margin for the manifolds appears to be less during 1988-89 compared to the corresponding numbers from 1987-88. (Table 1) .
Table 1
A further dig into the details reveal that for manifolds as well as other products , Bridgton was able to maintain an upward trend in terms of gross profit while net profit, started plunging maximum for manifolds compared to rest of the products. This is primarily due to
o All the products including manifolds during 1987-88 covered and contributed proportionately towards overhead costs (~435%), while during 1988-89 as muffler/exhausts and oil pans are outsourced (hence dropped from the product list) the overhead cost are spread over less number of products resulting Manifolds to have a larger share of overhead to be absorbed.
o The costs corresponding to the redistribution of personnel into other departments and outsourcing cost spiked the overhead costs to rise from a rate of ~434% to 576%. Due to the absence of selling price per unit, it appeared that the aggregate net profit of the products (including manifolds) increased (as a % of sales revenue) while the net profit for manifolds (as a % of sales) are much reduced (14.01% in 1988-89 compared to 23.06% in 1987-88).
o Manifolds...
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