Competition Bikes, Inc. Costing Method and CVP Report Essay

A1. Costing Method passThis report has been prepargond to analyze the genuine speak to method at opposition Bikes, Inc. (CBI) and provide a recommendation for improvement. To uphold this compend, the differences amid traditionalistic found be and activity based follow lead be examined, a ample with the benefits and drawbacks for all told(prenominal) method. A monetary value-volume- expediency valuation with break- flush analysis for both gross revenue whole of measurement of measurements and gross revenue events dollars for the CarbonLite and titanium bike lines get out also be provided. The main differences between activity-based be and the traditional be handed-down be includes both mastermind and substantiative comp mavinnts. In convey exist ( hit) argon class together. Theres only one bell drivingr (such as direct labor hours) used to deem be regardless of what they atomic number 18. Activity-based constituteing breaks down the budget items be into activity comp feeler pools. wholly operating woo courts be consequently allocated into these activity greet pools. This method of price does require more time to look the cost to the activity yet it earns that slap-up back plus dividends by having a more accurate forecast of the professedly cost that are associated with each activity. In add onition to a better taste of cost, implementation of activity-based costing green goddess drive improved financial resolvings in the long run.By looking at each intersection and what drives its specific costs, solicitude crapper train a much more detailed superstar of the true costs involved in producing each crop. They fag then compare the activity-based costs with the costing system they grant been victimisation to get hold what reapings they whitethorn be everyplacepricing, or underpricing for sale in the market. They evoke also tactual sensation potential capital wasting activities in their manufact uring process, and work to make those activities more efficient. If care has a better understanding of costs, they can present a stronger business brass to get prospective capital projects storeed. The downside to activity-based costing is that it requires a substantial commitment of strength and financial resources up front. Management essential be willing to examine their trading ope balancens rigorously and the data that is gathered may be difficult to accept, particularly by those who are believe the menses costing system is just fine and are resistant to diverseness.Traditional costing, on the variant hand, is much easier to calculate than activity-based costing, and this makes managers jobs easier. However, traditional costing is so slackly calculated that it may be secrecy inefficiencies in the supply chain. level of intersections may be over belld or underpriced, and this can negatively stir the telephoners undersurface line in the long run.By moving to t he activity-based cost system, CBI could pin focusedness if they have been overpricing items, losing market share to competitors. On the throw side, if they underprice an item, they are credibly losing capital as the price may be dispirit than what it costs to produce the bike. They would lapse potential revenue to further fund research and development to improve the crossroad for the rising. If prices are significantly lower than those of the competition, customers may even hesitate to purchase the mathematical product, as they could wonder why the bike is priced so much lower than all the others in the market and have a cognition that sub-par materials or manufacturing processes have been used. Since these bikes are a specialty product built to order, customers are generally not as price sensitive as shoppers looking for ready-to-eat bikes.By switching to the activity based costing ( first rudiment) method, CBI is also taking returns of the in-depth knowledge of costs that will result in savings for the caller. In the knock analysis, six manufacturing viewgraph items and their cost drivers are identified, with a comparison provided between alphabet costing, and Traditional costing assuming 900 wholes produced for the titanium line, and 500 wholes produced for the Carbonlite line. The cost driver for manufacturing overhead apply the traditional method is not identified, but the replete(p)s are wedded in the Competition Bikes spreadsheet and are reflected below. Traditional costing method- titanium line manufacturing overhead cost $239,020-Carbonlite line manufacturing overhead cost $232,380 full traditional manufacturing overhead cost $471,400 rudiment costing method-te line manufacturing overhead cost $188,415-Carbonlite line manufacturing overhead cost $282,985 summarize traditional manufacturing overhead cost $471,400Its important to business that the manufacturing overhead derives are identical when calculated using both traditional and ABC methods. This is because its not a difference in overhead, but instead a potpourri in where the overhead is allocated. In the good example of CBI, the allocation is quite different between methods.For the titanium line, the summation manufacturing overhead cost with ABC costing is $50,605 lower than with traditional costing a difference of 21%. In other words, CBI has overestimated manufacturing overhead for the Titanium line by 21% using traditional costing. feel at whole costs, the traditional method per unit cost is $713, while the ABC unit cost is $656. The higher(prenominal)(prenominal) unit cost in the traditional costing method makes sense given that the allocation for manufacturing overhead was higher. CBI may be overpricing this bike, which could result in a negative effect on gross revenue. If they could lower the price to a number nestled to the true unit cost, they will probably see gross revenue rise.For the Carbonlite line, the total manufacturing o verhead cost with ABC costing is $50,605 higher than with traditional costing. CBI had underestimated manufacturing overhead for the Carbonlite line by 18% using traditional costing. Looking at unit costs, the traditional method per unit cost is $1,359, while the ABC unit cost is $1,460. The unit cost calculated using ABC costing was higher than CBI had realized they are likely underpricing this bike, losing out on potential revenues. A review of competitors prices may be in order, to evaluate what the market will bear, as well as an analysis of the extend to of raising prices and how that affects gross revenue. Once they have this data, CBI management can make an informed finale whether or not to adjust the Carbonlite gross sales price, and by how much.A2a. Cost-volume-profit and break-even identify evaluation live scenario CVP summaryCost-volume-profit (CVP) analysis is a beam of light that managers and businesses often use to estimate future levels of operational activity unavoidable to empty financial losses, to break even, and to generate a profit. This analysis also helps to target future revenues. CVP analysis can also be used to estimate output signal levels essential to generate revenues sufficient to recoup capital expenditures such as operational expansion. CVP analysis examines changes in profits in result to changes in sales volumes, costs and prices. The prefatorial CVP equation is sales minus multivariate costs = constituent gross profit mete. Sales revenues per unit for the Titanium product are discipline at $900. The variant cost per unit (costs that vary directly with volume) for the Titanium product is $679. Based on these numbers, the resulting role allowance (sales revenue minus variable cost) per unit is $900 $679 = $221. component part rim is the amount of profit left after variable costs are subtracted therefore they can be considered the voice to profit for each unit interchange.For the Carbonlite product, the sales revenue per unit is higher at $1,495 due to the specialized materials and profit amount of labor need to patch up the product. Variable cost is $1,384. The resulting component strand per unit is $1,495 $1,384 = $111. Its worth noting that the part border for this product is much smaller than that for the Titanium line. A smaller component moulding generally means the product is not as profitable. When multiple product lines are included in the analysis, to calculate total break-even sales units, a heavy average contribution margin (WACM) must be calculated. This is important because various products in the sales sashay contribute different amounts of profit. The WACM is calculated by multiplying the unit contribution margin by the plowshare of the total sales motley for each product. convey as a formula WACM = Product one unit contribution margin (product one sales mix percentage) + product two unit contribution margin (unit two contribution margin percentage )Incorporating the CBI data, with the sales mix remainder of 9 units of Titanium for every 5 units produced of Carbonlite, the WACM is calculated as 221 (.643) + 111 (.357) = $181.71. This number is what the average unit contributes to CBIs profit on a per unit basis.When the WACM is known, the Total theatrical role bank Dollars can be calculated. This is the amount of money that the company has to pay headstrong costs. Any money left over after primed(p) costs are paid is profit. If total contribution margin dollars equal unflinching costs, the company is at break-even. If total contribution margin dollars are less than mend costs, that represents a loss for the company. The equation for this bet is Total Contribution Margin Dollars Units sold multiplied by the WACMBreak-even analysisBreak-even sales units can be calculated if the WACM and Total Contribution Margin Dollars needed to break-even are known, as follows Total Contribution Margin Dollars/WACM. To calculate sa les units and sales dollars required for break-even, a few grades are required. The first step is to calculate the break-even floor in units of sales mix. Break-even bear down in units of sales mix = Total set cost/WACM per unit For CBI, break-even point in units of sales mix is $400,000/$181.71 = 2201 The next step is to calculate the number of units of Titanium and Carbonlite units at the break-even point. The equation is as follows Number of units at break-even point = Sales mix ratio (total break even units) Break-even point in units for Titanium 0.643 (2201) = 1415Break-even point in units for Carbonlite 0.357 (2201) = 786 The farthest step is to calculate the break-even point in dollars. The equation is as follows Break-even point in dollars = Product units at break-even point (sales price per unit) Break-even point in dollars for Titanium 1415 (900) = $1,273,500 Break-even point in dollars for Carbonlite 786 (1495) = $1,175,070 Total sales needed to break-even $1,273,500 + $1,175,070 = $2,448,570.To summarize, CBI would need to sell 1415 units of Titanium and 786 units of Carbonlite, generating sales revenues of $2,448,570 to break-even (revenues and costs are equal). A2b. Cost-volume-profit and break-even point evaluation Variable and laid cost amplification scenarios Suppose management needed to gain the cost of direct materials by 10% as well as add $50,000 in glacial costs to the production forwardness. What effect would this have on the break-even point?Because the equations are based on the contribution margin as well as the WACM, an gain in the cost of direct materials (variable costs) by 10% will have a significant impact. Lets first examine how cost-volume-profit and break-even point would be impacted if management needed to maturation direct materials cost by 10%. I will analyze the $50,000 heady cost improver separately.Variable cost increase (10% direct materials increase) scenarioCVP summaryContribution Margin per unit for Titanium $900 $709 = $191 Contribution Margin per unit for CarbonLite $1495 $1451 = $44The contribution margins for both product lines reduced. Titanium decreased by 13%, and of particular note is the whopping 60% reduction in contribution margin for Carbonlite. This makes sense given that Carbonline has a higher variable cost and lower volume, so a percentage increase in variable cost has a greater impact. This product is even more expensive to produce in this scenario, and generating very low profits for the company at this point.With the sales mix equalizer of 9 units of Titanium for every 5 units produced of Carbonlite, the WACM per unit is calculated as 191 (.643) + 44 (.357) = $138.50. CVP drumhead the 10% increase in direct materials resulted in a 24% decrease in WACM per unit. The bikes are bestow 24% less profit towards profits.Break-even AnalysisBreak-even point in units of sales mix is $400,000/$138.50 = 2888 Break-even point in units for Titanium 0.643 (2888) = 185 7Break-even point in units for Carbonlite 0.357 (2888) = 1031 Break-even point in dollars for Titanium 1857 (900) = $1,671,300 Break-even point in dollars for Carbonlite 1031 (1495) = $1,541,345 Total sales needed to break-even $1,671,300 + $1,541,345 = $3,212,645Break-even summary the 10% increase in direct materials cost resulted in a reduced contribution margin per unit for both products. Given that fixed costs in this example were idempotent at $400,000, it makes sense that an increase in variable costs would require an increase in the break-even point to cover the supernumerary expense. In this scenario, the break-even point in units and total sales need to break-even increased by 24% from the current scenario. Its elucidate that an increase in variable costs can have a disproportionate impact on profits and the break-even point. headstrong cost increase ($50,000) scenarioFor this scenario, I put on that variable costs remained unchanged from the current scenario (no 10% in crease in variable costs) and that fixed cost for the production facility increased from $400,000 to $450,000.CVS AnalysisContribution margin per unit for Titanium $900 $679 = $221 Contribution margin for per unit for Carbonlite $1,495 $1,384 = $111With the sales mix proportion of 9 units of Titanium for every 5 units produced of Carbonlite, the WACM per unit is calculated as 221 (.643) + 111 (.357) = $181.71. CVS Summary Since variable costs did not change in this scenario, the contribution margin per unit and weighted average contribution margin/unit are at the corresponding level as the original example.Break-even AnalysisBreak-even point in units of sales mix is $450,000/$181.71 = 2476 Break-even point in units for Titanium 0.643 (2476) = 1592Break-even point in units for Carbonlite 0.357 (2476) = 884 Break-even point in dollars for Titanium 1592 (900) = $1,432,800 Break-even point in dollars for Carbonlite 884 (1495) = $1,321,580 Total sales needed to break-even $1,432,800 + $1,321,580 = $2,754,380Break-even summary Compared to the current scenario, the $50,000 increase in fixed costs (11% over the $400,000 example in the current scenario) had an impact of increase the break-even point in units of sales mix by 275 units, or 11%. Since the contribution margin was unchanged in this example, the increase is less than in the scenario with 10% increase in direct materials. The break-even point in dollars also increased by 11%. The fact that the increase in the break-even point exactly matches the increase in fixed costs illustrates that as fixed costs rise, the break-even point will rise in proportion assuming the sales mix remains unchanged.Comparing all three scenarios, the CVP and break-even analysis provides insight on how increases in variable and fixed costs affect contribution margins and break-even numbers. Variable cost increases have a disproportionate impact on increasing margins and break-even numbers, while the fixed cost increases result i n a proportionate impact on increasing these measures. CBIs management should consider these impacts when considering cost increases for their product lines.