Variable Cost and Breakeven Point Essay

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Running head: JET2 FINANCIAL ANALYSIS TASK 4: COMPETITION BIKES

JET2 Financial Analysis Task 4: Competition Bikes
Gregory Hairston
Western Governors University

JET2 Financial Analysis Task 4: Competition Bikes
Purpose:
Competition Bikes, Inc. (the company) makes bicycles for professional and highly accomplished riders who compete in bike races, biathlons, and triathlons. Originally the company offered only its CarbonLite product which is a light weight customized bike built to the customer’s unique physical tools. A number of years ago, the company added a Titanium product after having acquired the technology of Canadian Biking. The company’s vice president has directed that a cost study be conducted and an activity-based cost analysis be conducted at the San Diego plant. This summary report will include the following:
1. A recommendation whether the company should change its costing method to activity-based costing.
2. An evaluation based on cost-volume-profit that includes the following:
a. Analysis of the breakeven point of Competition Bikes Inc. with regard to sales units and sales dollars for CarbonLite and Titanium bikes.
b. A summary report that describes the impacts to the breakeven point if the company management needed to increase the cost of direct materials by 10% cost increase and needed to add $50,000 in fixed costs to the production facility.
1. Recommendation Whether the Company Should Change its Costing Method to Activity-Based Costing:
The company is currently using traditional costing method in its business practices. Traditional based costing is a business accounting strategy which seeks to determine the cost of manufacturing products in relation to the revenue generated by the sale of the products. Both costing methods determine the overhead production costs and allocate the costs to the company’s products. A component that costs money or any factor that is related to a cost occurring is a cost driver. Examples of cost drivers include volume produced and labor hours. (Hayden, 2014) Traditional costing assigns costs based on an average overhead rate. This method takes the appropriate cost hours, such as labor hours, and pools all indirect production costs and applies these costs equally across the board.
Activity based costing identifies all activities indirect and direct associated with production. These activities are not pooled but are specific to the production of a specific product. The costs of all activity associated with producing product is assigned. These assigned costs are then applied as the costs of production.
Analysis of the data collected using the traditional based costing shows a total production cost of $641,430 for the 900 Titanium bikes or $713 per bike. With ABC costing the total production cost of the Titanium Bikes is $590,715 for 900 bikes or $656 per bike. For the CarbonLite Bikes the total costs using traditional methods shows a cost of $679,380 dollars for 500 or $1359 per bike. The ABC method shows a total cost of $729,985 for 500 bikes or 1460 dollars per bike. The direct material and labor costs using both methods are identical. The difference is in the allocation of overhead costs. By pooling total overhead costs, allocation is based upon total cost of all bikes and divided by total labor cost. Under this formula, total overhead cost is $1.951 per direct labor dollar. This equates to a cost of $280.94 for the Titanium Bikes and $437.02 for the CarbonLite Bikes.
Using ABC method, which looks at each product manufacturing line item individually in its overhead cost, shows a total production cost for the Titanium bikes of $590,715 for 900 bikes or $656 for each bike. For the CarbonLite bikes it shows a production cost of $729,985 for 500 bikes or $1460 for each bike.
It is recommended that the company switch to activity based costing (ABC) as its costing method. ABC provides a more accurate way of allocating costs. Overhead costs are not generalized and then
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