Bridgewater Castings, Inc.
This haevily disguised case is set in the “nature “woodstoves business in 1986. It is not based on The Vermont Castings Company. The issue is product line strategy based on product line profitability.
In early 1986. Tim Morrissey was reviewing the disappointing 1985 results of oprations for his company ( see Exhibit 1). The business had been founded in 1938 by Tim’s grandfather as a modermization of an older iron forge company which Tim’s great- great –grandfather had built up over the years since 1902. The company entered the cast iron wood stove business when that market boomed in the early –1970s.By 1977 wood heating stoves was its only product line. The business oprated out of lesed factory and office …show more content…
Genral factory overhead, which we consider fixed was $2,520,000 last year. Of that $800,000 was depratciation. Rent is $550,000. Factory support cost are $1,170,000. I consider these three costs pretty much common to all production, so I assign them on the basis of units produced. Variable manufactuing overhead is another $1.1 million which I assign based on units. You might argue about the overhead allocations a little, “ she continued”. “but not very much. When we made only stoves, there was no product line allocation to worry about. I suppose now you could go to an allocation based on labour, but the difference would not be large. The ovens each take a little more time to manufacture, but we make fewer total ovens.” She gave him a summary of manufacturing costs for the year ( Exhibit 2 ) to look at.
Cooper continued explaining, “ Allocating nonmanufacturing costs is always a lot more subhjective, but the way I split them seems very resonable to me. Stoves generated more total volume in units and dollars, but ovens have been harder to sell and distribute. Stoves really constitute the base business, with ovens as the incremental new business. After thinking about it for awhile . I decidedto charge selling and shipping on the basis of precent of sales dollars across the two products. Then I just split the half million of general expenses equally between the two lines since the sales