Competition Bikes (CB) is making CarbonLite and Titanium bikes. To streamline cost there need to be an investigation into which practice is most efficient and cost effective for the CB. Competition Bikes is using a traditional based costing (TBC). There needs to be a comparison between the current use of TBC and activity based costing (ABC) to decide which is most beneficial to the company. Also, the breakeven point to cost volume profit needs to be evaluated. There is a potential for a $50,000 increase in production and a 10% material cost increase.
A1 Costing Method
Traditional Based Costing is, “The allocation of manufacturing overhead (indirect manufacturing costs) to products on the ...view middle of the document...
This could translate into overcharging clients and in turn could decrease the overall client base. Or, the company could be undercharging for the products which means, there is a loss of profit due to inaccurate pricing.
Titanium bikes have a total production cost of $641,320 using the TBC and only $590, 715 for ABC. The CarbonLite bikes using the TBC have a total cost production of $679,380 and $729,985 for the ABC.
When calculating under TBC the Titanium cost per unit is approximately $713 ($679,320/900=$712.57). When calculating in the ABC method the Titanium cost is about $656, ($590,715/900=$656.35). The TBC method there is an overestimation of cost per unit, with a difference of $57.
The CarbonLite pricing using the TBC method shows cost per unit to be about $1359 ($679,380/500=$1358.76). Using the ABC method the cost per bike is about $1460 ($729,985/500=$1459.97). The TBC method overestimates the cost by $101.
By using the TBC there is a greater chance of over pricing the bike which allows the competition to sell the same product for less money. This translates into the customer purchasing the bike with another company. This is lost revenue due to inaccurate pricing.
There needs to be a transition from the TBC to the ACB method. It will take more time to calculate the ABC method, but the accuracy in pricing is well worth the extra time and effort. The company has started looking at manufacturing and nonmanufacturing costs. This change will ensure a more stable and accurate budget. It will also give shareholders a better return on investments through sales forecasting and correct budgeting.
A2a Breakingeven Point
Breakingeven Point can be basically defined as, “At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. (Breakeven Point, 2014) For CB’s San Diego plant is looking at the sales mix which will give the breakeven point. This means it is the number of each type of bike sold to ensure there is not a financial loss or profit. The company will need to look at the revenue per unit, variable costs per unit, contribution margin per unit and weighted contribution margin per unit. Reviewing these items will help CB during the transition from TBC to ABC.
The revenue/unit equals the money made for each bike sold. The sale per unit is $900 for Titanium and $1495 for CarbonLite. The variable cost/unit is the cost that can change outside of production. The variable cost is $679 for Titanium and $1384 for CarbonLite. The total cost needs to have a variable and fixed cost so contribution margin can be calculated. There are 2 ways to find contribution margin (CM), also known as gross profit. One way is to find overall margin, the other is the margin per unit. CB’s contribution margin can be calculated by taking the selling price of the bike-variable cost for each bike. Titanium bikes have a CM per unit of $221 and CarbonLite $111. Also, the weighted average CM...