Competition Bikes Inc. Storyline Essay Example for Free

tilt Bikes Inc. plot line EssayTo Vice PresidentThe following is a summary underwrite to recommend whether Competition Bikes should substitute its traditional courting method to activity found costing, and an analysis of the offendeven address with regards to gross sales building blocks and dollars for both CarbonLite and si bikes. It too discusses the impacts to the breakeven point. The cost-volume-profit evaluation and the traditional vs activity based costing method overhead analysis were utilize for the review and analysis.Traditional Based cost vs Activity Based CostingTraditional Based Costing Method (TBC). TBC uses one rate, the overall cost of performance, to estimate cost based on the revenue growthion created. Unlike ABC, manufacturing costs in TBC be only assigned to sold merchandises and do not grudge for nonmanufacturing costs such as administrative costs. This method is general not as accurate as ABC as it does not account for costs specifics to th e level of products. For Competition Bikes, the go with peck serve its manufacturing overhead is $239,020 for the si bikes, and $232,380 for the CarbonLite bikes for a total of $471,400 in overhead costs. This means the unit cost for severally is $713 for atomic number 22 bikes, and $1359 for the CarbonLite bikes.Activity Based Costing Method (ABC). ABC determines and allocates cost by activities a friendship executes. This generally happens in four steps identify each(prenominal) activity and its associated costs, both total and validating estimated cost driver and quantity allocation computation and cost allocation to the respective activity. ABC refines the fashion indirect costs are allocated to production and focuses on the costs of each individual activity. Costs are also further assigned to each product within the activities and each activity has its own cost driver. Because of thespecificity, active based costing provides a more accurate picture of the true costs. Direct significant (DM), and direct labor (DL) are the like for each bike in using TBC or ABC.However, in using ABC, the beau monde can break out the manufacturing overhead into factory setups, quality control, engineering services, product movements, utilities and services, and depreciation. The total for each bike using the ABC method is $590,715 for si bikes, and $729,985 for CarbonLite bikes. Although the total is still the same $471,400 in overhead costs, the ABC method allows Competition Bikes to see that the si bikes depreciate much hot than the CarbonLite and that it takes more utilities and services to make those bikes. Factory setups and quality control are much higher for CarbonLite bikes than those for Titanium ones. Per unit, the Titanium Bikes cost $656 each and the CarbonLite bikes cost $1460.Recommendation.It is recommended to use ABC to determine true costs associated with activities and products. This give give the company more hit the hayledge of its finan ces and spending and in return by perceive a clearer picture of costs, make better decisions on funding and budget, and gain cost savings. Activity based management in Competition Bikes can use ABC to make decisions that subjoin profits piece still meeting customer needs. Understanding where costs are going result patron Competition Bikes to remove unnecessary costs and set fair price for the products. Overpricing products causes a lost in merchandise sharing while underpricing products diminishes revenue. Better prices for consumers means more business for the company.With activity based costing, Competition Bikes will be able to determine the optimum sales units required with the sales mix of 9 Titanium bicycles produced for every 5 CarbonLite bicycles that will produce the bikes at San Diego at breakeven. The company will also be able to reevaluate activities on a regular basis to reduce future costs as well. Evaluating activities and setting sales prices are part of value engineering. Currently the company thinks it costs $1359 to make a CarbonLite bike and fill set the selling price accordingly. In reality, the bikes cost $1460 to make. With a $101 difference, the company may want to adjust their selling price in future months.Using ABC also allows the company to use the Just in Time (JIT) system. This system allows ensures materials are purchased just in while to produce the products, and products are completed just in time for delivery. JIT uses the demand-pull system to receive the order, schedule production, delivered materials, and immaculate product delivered to the customer. This lessens the amount of excess parts and inventory saving the company money as well.Breakeven layerThis analysis will evaluate the breakeven point for Competition Bikes Inc. Sales units and sales dollars will be place for the breakeven point. These sales units and dollars will be broken down between CarbonLite and Titanium bikes.The breakeven point is used my com panies to embarrass loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume that the stock-still and protean costs remain constant, and that the number of units produced equals the number of units the company sells.CVP is defined by the equation do revenues Total Costs = Profit. The breakeven point is the point in which the CVP equals nobody or, Revenues Expenses = 0. Meaning, the revenues cover all the costs, fixed and variable. Therefore, the CVP can be further broken down into Total Revenue Total Fixed Co sts Total changeable Costs = Total Profit.The constituent rim is because identified by Total Revenue Total Variable Costs (leaving out the fixed costs). voice bound is important to identify the differences in each products profits. For Competition Bikes, the contribution molding for the Titanium bikes is $900-$679=$221. TheCarbonLite Bikes yield $1495-$1384=$111 each. Using the 450 Titanium bikes and 250 CarbonLite bikes sold, the total combine contribution brink for Competition Bikes is $127,000. Thats broken down like this Titanium Bikes contribution margin of $221 per unit, 450 units equals $221*450, or $99,450. CarbonLite bikes contribution margin of $111 per unit, 250 units equals $27,750. donation margins $99,450 + $27,750 = $127,200 Total section Margin.To determine the profits in more detail, we use the equation (Selling Price (per unit) * beat Sold) (Variable Costs (per unit) * Quantity Sold) Fixed Expenses = Breakeven Point (Zero). The fixed costs are the units sold * the weighted fair(a) contribution margin. The weighted come contribution margin is used to find the breakeven point and is essentially the average of contribution margin amounts per unit. The equation is Total Contribution Margin / Total Quantity Sold. For Competition Bikes, our combined weighted average contribution is $181.71. Thats $127,200/ 700 units sold (450 Titanium and 250 CarbonLite bikes) = $181.71.To establish the breakeven point, we also need to k straightway the combined revenue and costs as well. So we calculate total revenue as the following. Titanium bikes are $900 each and 400 units sold, equals $405,000. The CarbonLite bikes are $1495 each and 250 sold which equals $373,750. Combine the $405,000 + $373,750 = $778,750 Total Combined Revenue.The variable costs for each are Titanium bikes $679 in costs, 450 sold, which equals $305,550 or $679*450 = $305,550. CarbonLite bikes $1384 in costs, 250 sold, which equals $346,000, or $1384*250= $346,000. The tw o together, $305,550 + $346,000 = $651,550 Total Combined Variable Costs. The total combined margin can also be calculated by taking $778,750 subtracting the $651,550 and it equals the same $127,200 Total Combined Margin we calculated earlier. We use this as a obstructor and balance system here.To determine the breakeven units, we look at the fixed costs and weighted average contribution margin discussed earlier. The fixed cost for the company is $400,000. Divided by the weighted average contribution margin181.71, we get the breakeven units for the product sales mix of 2201.The contribution margin ratio is the percentage of contribution margin to revenue. To find the contribution margin ratio, we divide the total combined margin by the total revenue. This tells us by how much the price per unit exceeds the variable cost per unit. In this scenario, Total Combined Margin $127,000 divided by Total Revenue $778,750 which is .163, or $127,000 / $778,750 = .163 Contribution Margin Ratio. Since the bikes are not equal, we mustiness calculate a product mix in addition to the weighted average. Using the weighted average, we can calculate the breakeven point in a proportionate way using sales units and sales dollars. For sales units, we take the breakeven units for the product sales mix and multiply it by the ratio of units sold divided by the total number of unit sold. So for Titanium, the sales units at the breakeven point is 450 / 700 * 2201, or 1415 units. For CarbonLite, 250 / 700 * 2201 = 786 units.To calculate the sales dollars, we multiply the sales units by the sales price. In this instance, Titanium is 1415 units reckon by $900 cost for each unit or, 1415 * $900 = $1,276,500. CarbonLite is 786 units calculate by $1495 price for each unit, or 786 * $1495 = $1,175,070. The combined total sales dollars is $2,451,570To break even, the profit must be zero. Gains and losses are equal. For Competition Bikes, the breakeven point is 1415, or $1,276,500 in Titanium b ikes, and 786 CarbonLite bikes, or $1,175,070.Impacts of the Breakeven PointA2b. Based on an evaluation of cost-volume-profit, Prepare a summary report that describes the impacts to the breakeven point if company management needed to adjoin the cost of direct materials by 10% cost increase and needed to add $50,000 in fixed costs to the production facility.Company management has asked for a report on the impacts of increasing thecost of direct materials by 10% and fixed costs by $50,000 in relation to the breakeven point. The contribution margin and weighted average are based in part on direct materials, or variable costs. Raising the costs by 10% is significant and will have a great impact on the company.Total Revenue is $778,750 and variable costs now $681,800. This increase is broken down by variable cost per unit to $709 for Titanium bikes, and $1551 for CarbonLite.The Contribution Margin per unit is now 191 and 44 respectively lowering the total combined contribution margin to $96,950. CarbonLite bikes contribution margin decreased from $111 to $44 per unit, over a 60% decrease. Calculated by dividing the Total Combined Contribution Margin $96,950 by the Total Units of 700, the 138.50 weighted average contribution margin per unit also dropped by 24% from 181.71. This shows how significant a 10% can be to the contribution margin. Ten percent in one area can mean much larger impact in other areas.With an increase in fixed costs to $450,000 that now brings the breakeven units for the product sales mix to 3249. We calculate this by $450,000 fixed costs divided by the lower weighed average contribution margin 138.50. This continues to affect numbers as we calculate sales units and sales dollars. Titanium bikes sales units are 450 units divided by 700 total units, multiplied by the weighted average 3249 for 2089 units. CarbonLite bike sales units are 250 units divided by the 700 total units, multiplied by the weighted average 3249, totaling 1160 sales. Sales d ollars are calculated as Titanium bikes 2089 units * $900 = $1,880,100 and CarbonLite bikes as 1160 units * $1495 = $1,734,200 for a total $3,614,300.The breakeven point is now increased. Sales for Titanium bikes is now up to 2089 units, or $1,880,100 and CarbonLite bikes up to 1160 units, or $1,734,200. By raising direct costs 10% and fixed costs 13%, Competition Bikes now has to sell 674 more Titanium bikes, and 374 CarbonLite bikes to break even. Thats a 48% increase.Based on this analysis, it would be in Competition Bikes best interest to try to keep costs low. Variable and fixed costs show that a small increase can significantly impact the companys breakeven point. Variable costs have a higher impact than fixed costs. Direct costs per unit should be specifically addressed in reducing costs as well as increasing sales.