Financial Analysis (Competition Bikes Inc.)
Abstract
The purpose of this research will discuss about how the company should change its costing method to the activity-based on costing. It will contain the evaluation of cost-volume-profit regarding of the sales units and sales dollars for Carbon Lite and Titanium bikes. It will support what company management needed to increase the cost of direct materials by 10% and the fixed costs to the production facility. There also some factors that have been discussing in this research about the ways of the company how to innovate their product in increasing their cost profit. However, the quality the employees work does not meet the standards of the company. This is reasonable because of the materials weaknesses that are relevant from the company purchase from the supplier. Though, the company makes sure that the quality of the service that they provide to the customer is properly served. These studies will show us what the ways that the company done to expand their market, and also the things they considered in maintaining the high customer quality service. Therefore, they didn’t look to the limitation of the details of their product. It also shows on this study the projected output they may get in next five years by which it their cost profit will increase by finding suitable sites all over the country. However, there are considerations that they need to risk in implementing those ideas that they gathered. By then, this research will also prove the success of the company throughout the demand needs of the market. This research will also identify the differences of the products in terms of the quality, quantity, and the cost of labor and how the Competition Bikes, Inc. runs their products in market space. In this study, we will find out how to the Competition Bikes Inc. increase their profit and how they use the materials to produce a qualitative product that their consumer really needs. This will also identify what components that are needed in preventing profit lost. It will also discuss in this research the average cost of the materials in creating a perfect product that you can sell.
Company Overview
Competition Bikes Inc. is a company that is engaged in manufacturing high quality bikes preferred by accomplished riders and the products are often being used for competitions such as biathlons, races and triathlons. The company started its manufacturing venture in 2001 from the visions of its founder Larry Ferguson. The first three years of the company’s success prompted Ferguson to take the company public and its initially acquired capital was used to build two manufacturing facilities. Each of the two manufacturing facilities follow applicable processing and operational guidelines set accordingly by its departmental functions. Among these departments is the accounting department that oversees the costs and financial aspects of the company. In the recent evaluation of the other manufacturing site, a breakeven analysis was completed along with a target profit projection. The assessed costing procedure was directed towards its two flagship products the Titanium Frame bikes and Carbon Lite. Based on the current manufacturing cost for the Carbon Lite product alone, the variable manufacturing overhead applied is at $94.529 per unit. Because of several global economic factors, the company is rethinking its costing methods from the traditional accounting principles to activity-based costing. This is due to the high cost of materials paired with 15% sales decline in recent years because of several economic factors.
The New Approach is Cost Accounting
Competition Bikes Inc. and its Vice President have retooled its cost accounting approach to consider activity-based costing. ABC encompasses a method described as determining the activities that the company performs and delegate indirect costs to its products running in the production line. The approach recognizes the relationship between several factors such as products, activities and costs. Through this identified relationship, the company would be able to assign costs to products with much easier arbitrary requirement than the traditional method. An evaluation of the method is provided in the later part of the report based on the breakeven analysis conducted through the study on one of Competition Bike’s manufacturing facility.
Recommendations
Costing Method systems naturally use a sole transparency group - that is a single accumulation of costs that are not directly identifiable as product part costs or as labor. This would comprise deliver and preservation operating cost, allocations of management salaries, reduction, etc. Management requests this information in regulate to make knowledgeable decisions concerning invention levels, pricing, competitive strategy, future investment, and a host of other concerns. Such information is mainly required for inner use, or managerial accounting.
Activity based-Costing utilizes a lot of smaller further embattled cost build ups that are accumulated based on "activities". Such as, if procure orders are only mandatory from a number of vendors, then the price of P.O. research and mailing is incorporated in a little transparency pool that is only owed to the products that use those parts. If a mechanism system procedure is only desired for the dispensation of definite parts, then the cost of the system is incorporated in the pool for simply those parts, etc. While customary process capacity categorize expenditure in generic categories like unswerving materials, labor, and other overhead, ABC clusters all the costs linked with a single industrialized task, in spite of whether they reduce under the headings of toil or materials or something else. So in the bottling example activity-based costs might include. Each of these activities may involve human labor, equipment costs, energy and expendable resources, and materials, but for critical purposes the costs are all protuberance together less than a single activity idea.
On my note ABC is more levelheaded to use than traditional. From the summary report Titanium and Carbon has the same expenses when it comes direct material, direct labor, total direct cost per unit for materials and labor. But in Manufacturing Overhead only traditional cost thus have. Other than that ABC has the only factory setups, quality control, engineering services etc., By means of this systems, it is identify as the major activities of a facilities making procedure and then classify these activities into one of the following categories; unit-level activities, batch-level activities, product-sustaining level activities, and facility-sustaining level activities. For example; the figure of straight work hours manufactured goods consumes is the price driver for unit-level activities. The quantity of setups merchandise consumes is the cost driver of batch-level activities; and the number of parts a product consumes is the cost driver of product-sustaining level activities.
Comparing the two products “Titanium” and “Carbon” it says that titanium is an ultimate fabric for making physically powerful and frivolous frames for larger riders. Also it is the best frame objects for touring in urbanized areas, although its repair complexity makes it inappropriate for inaccessible tours. Carbon fiber is tremendously ordinary in competitive street riding. As of 2010, carbon fiber is appearing in further mountain bikes because manufacturers contain urbanized models that make use of full postponement and new assembly techniques to with position the composite stresses of off-road riding. However, because of its grained excellence, strange pressures and impacts can still cause fracture, according to the Care Exchange.
As discussed absorption costing is the traditional approach to product costing and is primarily used for external reporting. Alternatively, variable costing is more commonly used for internal purposes because it makes cost behavior more transparent than does absorption costing. The variable costing presentation separates variable from fixed cost And facilitates the use of this chapter’s models:• Break-even point,• Cost-volume profit,• Margin of safety, and• Degree of operating leverage.A variable costing budgeted income statement for Competition Bikes Inc. is presented in San Diego Sales mix Competition Bikes Inc. manufactures a high-quality line of desk bikes. Product specifications have been established for several years and will continue at least until present. In addition to the traditional income statement information, per unit amounts are shown for sales revenue, variable cost, and contribution margin. The company has a total variable production cost of 1,320,701, a variable selling expense of 10 percent; Competition Bikes Inc. data are used throughout this chapter to illustrate break-even and cost-volume profits computations. A company’s break-even point finding the first understanding company revenues and cost. A short summary of revenue and cost assumptions is presented at this point to calculate the cost-volume profits analysis.
Analysis
With regards to Competition Bike’s breakeven point in terms of sales dollars and units sold for both the Titanium and Carbon Lite products. It appears that variable cost per unit in each of the product category would be $679 for the Titanium and $1,384 for Carbon Lite based on the sales price per unit of $900 dollars for Carbon Lite and $1,495 for Titanium. The apparent contribution margin for Titanium would be $221 and $111 for the Carbon lite per each unit. On the other hand, based on the total sales mix of 1,400 (500 Carbon Lite units and 900 Titanium units), the contribution margin is estimated at $55,500 for Carbon Lite and $198,900 for the Titanium with a total estimated margin of $254,400 combined. To average the weight of contribution margin for each unit it will amount to $181.71 from the total sales price mix of 1,400 units.
Applying the concept of activity-based costing, it will appear that the breakeven points for Carbon Lite would be 786 units and 1,415 for Titanium. To determine the breakeven points in sales dollars, the desired number of breakeven units for Carbon Lite will be multiplied to its selling price of $1,495 and will give total revenue of $1,175,070. The Titanium bikes, a total of 1,415 breakeven units will be multiplied to its selling price per unit of $900 and will result to total revenue of $1,273,500.
If the given amount of breakeven units and selling price are to be based on a $50,000 increase in fixed cost with a 10% increase in materials cost. The variable cost per unit will be $709.30 for Titanium and $1,451 for the Carbon Lite. In addition, the contribution margin would also decrease. For example, Carbon Lite formerly has a contribution margin of $111, but if there would be an increase in fixed and materials cost, contribution margin will decrease to $44. Titanium on the other hand will also show same decreased contribution margin due to the increase in materials and fixed cost. If the contribution margin for Titanium is $221, it will be reduced to $191 respectively. Given the total sales mix of 1,400 units, the total contribution margin for Carbon Lite would be $22,000 and $171630 for Titanium. In average the weighted contribution margin for each unit will also decrease from $181.71 to $138 after the increase.
The determined breakeven points for Competition Bikes Inc. after the said increase in fixed and materials cost would be a total of 3,254 units (1,162 units for Carbon Lite and 2.092 units for Titanium). In terms of sales dollars, Titanium bikes breakeven units of 2,092 multiplied by the selling price unit of $900 will result to total sales revenue of $1,882,800. Carbon Lite bikes on the other hand will result to total sales revenue of $1,737,190 given the breakeven units of 1,162 multiplied by its selling price of $1,495 per unit. In activity-based costing, there are six identified overhead costs that are referred to as cost drivers namely factory set ups, quality, engineering, Forklift service, utilities and depreciation. To compare the cost of each overhead, a table was provided below showing the difference in costs between traditional ABC.
Based on the illustrated changes and differences between ABC and traditional, it appears that the unit cost summary for Titanium would $713 in traditional cost, while ABC trims it down to $656. On the other hand, Carbon Lite bikes will incur a higher cost in ABC amounting to $1,460 as compared to the traditional cost of $1,359. Given the figures in average cost of each bike under traditional costing and ABC, it appears that the Titanium bikes will have a $144 lower cost while Carbon Lite will exceed $224 dollars in cost if ABC will be applied as the costing method.
Conclusion
As a result of the conducted breakeven analysis, it is apparent that ABC only applies to the Titanium bike and will not be applicable to the Carbon Lite bikes. This is because ABC enables the Titanium manufacturing cost to get even lower based on the cost of the identified overheads. However, since the overhead cost of manufacturing the Carbon Lite is higher, ABC will not help in reducing the cost of the overhead, but instead will make it even higher due to the fact that the contribution margin of Carbon Lite is lower than the Titanium product.
