Financial Analysis, Competition Bikes – Summary Report Task 3
The following is an analysis regarding if Competition Bikes Incorporated should change its traditional costing method to activity based costing (ABC). This consideration is being given because the organization is changing its sales strategy in the San Diego plant to produce 9 Titanium bikes for every 5 CarbonLite bikes, and there are indications that manufacturing will experience a 10% increase due to new environmental regulations.
Traditional costing methods is the process of determining a unit cost by lumping indirect costs of manufacturing together and then parceling out by volume, number of units, machine ...view middle of the document...
When using the ABC method the total product cost is 590,317. The benefit of ABC is that it has identified that the organization has overestimated the cost to produce the Titanium bikes or that the production of this bike is using less “resources” during production than originally anticipated.
In reviewing the CarbonLite product, the traditional manufacturing overhead cost is 232,280 plus a direct cost of 447,000 for a total product cost of 679,380. The ABC method calculates the manufacturing cost of 282,985 plus the direct cost of 447,000 for a total product cost of 729,985. This ABC analysis has identified that the CarbonLite is generating more activity cost than calculated under traditional costs and more cost than the Titanium bike.
.. This option offers the highest net income, EPS, no interest on bonds, and pays dividends to shareholders for years nine through thirteen. Using a preferred stock will guarantee a fixed dividend amount to stockholders but will also allow the company to withhold dividend in the event that they run into financial difficulties. The advantage of common stock is to yield a higher return on investment than issued from preferred stock. This mix will maximize profits and market price per share while allowing the organization to liquidate investments if needed. The other options under consideration are not a viable alternative because they do not generate as high of a EPS as the mix of preferred and common stock.
The 9% Bond option has the lowest ROI of all options. This capital structure has the highest interest payment of 72,000 resulting in the lowest EBT, the lowest net income, no dividends, and the lowest EPS for all years. Therefore, it is not cost effective to finance the expansion using this capital structure because the organization would take on additional debt by purchasing bonds and not receive an adequate ROI. In addition, with reduced net income and reduced EPS, the company is likely to experience cash flow issues and a lack of enthusiastic public investors. The Total EPCS for years nine through thirteen respectively are .002, .009, .019, .031, and .042 in comparison to the recommended option EPS scores of .027, .032, .039, .048, and .057. for this option in years 9-13 is $.103, the lowest of all five options.
The 20%/9% Bonds and Common Stock option does not generate as positive capital structure as 50%/50% option. Although EPS scores are the same for year nine, net income is reduced to 39,680 due to having to pay interest of 14,400 on bonds while the 50/50 option generates a net income of 49,049 and pays no interest on bonds and issues dividends. In year ten, both capital structures offer an EPS of .032 however the net income is 9,380 less than the 50/50 option. In years 11, 12, and 13, the 20%/9% Bonds and Common Stock option EPS and net income results decline while the EPS and net income results increase for the 50/50 option.