Question

6) Based on your findings for a-d above, create the ACTUAL 2018 Income Statement for BRBC using your recommendations.

I need help with the questions 5 and 6

Built Right Bike Company (BRBC) is an established manufacturer of quality bicycles. They manufacture three styles of bicycles.

Bicycle A is a popular racing bicycle primarily sold to dealers in the bicycle racing circuit. Their material is lightweight and durable with detachable joints for easy disassembly and storage. This market has been declining over the past couple years.

Bicycle B is a sturdy leisure bike typically sold to resorts for use by vacationers. This market is stable with regular replacement bikes ordered as well as new resorts and hotel expansions.

Bicycle C is the usual bicycle used by families and children and is the primary bicycle sold by the company outlet store Buy-Right Bike Shop (BRBS).

Budgeted financial Information is provided below.

Operating Budget
Standard costs	Bicycle A	Bicycle B	Bicycle C	Notes
Volume in units	80,000	120,000	200,000
Per unit:
Sales price	$                   150	$           110	$             80
Direct costs:
Materials	17	10	7	directly related to production volume
Labor	21	16	4	directly related to production volume
Subtotal	$                     38	$             26	$             11
Indirect costs:
Supplies	7	2	1	directly related to production volume
Labor	10	8	4	1/2 varies with direct labor; the rest is fixed
Supervision	8	3	1	unrelated to production volume
Energy	12	6	4	1/2 varies with direct labor; the rest is fixed
Depreciation	22	7	5	unrelated to production volume
Head office support	12	6	3	corporate office allocation*
All other	11	2	1	unrelated to production volume
Subtotal	82	34	19
Total product cost	$                   120	$             60	$             30
Product-line profitability	$                     30	$             50	$             50
* This category comprises accounting, IT, H/R, legal, and others supporting the production of this bicycles.
Allocations were made using multiple drivers. Corporate office budgets are unrelated to production levels.

Instructions:

Add two new sheets to your Excel workbook: one for BRBC calculations and one for BRBC Income Statement.

1) Compare using process costing, job costing, or activity-based costing to determine the best costing for BRBC.

2) Calculate the profitability of each product line if the volume increases by 10% each.

3) Calculate the profitability of each product line if the volume decreases by 10% each.

4) Explain the results of 1 & 2 above.

5) Based on this information determine the answers to the following:

a) Should BRBC stop making bicycle A? What is the impact of dropping Bike A from the line of products? Assume the other two product lines will not change in volumes or selling prices.

b) Should the price of Bike C be lowered? Consider the volume sold to sister company BRBS at only $52 per bike, which is eliminated when the corporation financial statements are consolidated. What happens if the price to all others is reduced to $75, and an additional 20,000 bikes were sold at this lower price (not counting the intercompany BRBS sales)

c) Should the company change its advertising focus? What would be the impact of increasing Bike C's volume and decrease in Bike A's volume by 10,000 units each? Disregard units sold to sister company BRBS.

d) Should the price of Bike C be lowered with the change to advertising focus? What is the impact if we lower the price of Bike C to $75 and shift advertising focus more to Bike C, potentially decreasing Bike A volume by 10,000 bikes and increasing Bike C volume by 30,000 bikes.

6) Based on your findings for a-d above, create the ACTUAL 2018 Income Statement for BRBC using your recommendations.

Activity based costing
	Bicycle A	Bicycle B	Bicycle C
Sales Price	150	110	80
Variable cost	(56)	(35)	(16)
Profit	94	75	64
Ranked	1	2	3
Calculating Variable cost Direct cost Bicycle A Bicycle B Bicycle C Materials 17 10 7 Labor 21 16 4 Indirect cost Suppliers 7 2 1 Labor (half is variable) 5 4 2 Energy 6 3 2 Total 56 35 16 Profitability of product line when volume increases by 10% Bicycle A Bicycle B Bicycle C Sale Volume in Units 88,000 132,000 220,000 Sales price 150 110 80 Sales (Total) 13,200,000 14,520,000 17,600,000 Direct Cost (3,344,000) (3,432,000) (2,420,000) Indirect cost: Supplies (616,000) (264,000) (220,000) Labor: Variable (440,000) (528,000) (440,000) Labor: fixed (400,000) (480,000) (400,000) Supervision (640,000) (360,000) (200,000) Energy: Variable (528,000) (432,000) (480,000) Energy:fixed (480,000) (360,000) (400,000) Depreciation (1,760,000) (840,000) (1,000,000) Head office (960,000) (720,000) (600,000) Other cost (880,000) (240,000) (200,000) Total cost (10,048,000) (7,656,000) (6,360,000) Total profit 3,152,000 6,864,000 (11,240,000) Profitability of product line when volume decreases by 10% Bicycle A Bicycle B Bicycle C Sale Volume in Units 72,000 108,000 180,000 Sales price 150 110 80 Sales (Total) 10,800,000 11,880,000 14,400,000 Direct Cost (2,736,000) (2,808,000) (1,980,000) Indirect cost: Supplies (504,000) (216,000) (180,000) Labor: Variable (360,000) (432,000) (360,000) Labor: fixed (400,000) (480,000) (400,000 Supervision (640,000) (360,000) (200,000) Energy: Variable (432,000) (324,000) (360,000) Energy:fixed (480,000) (360,000) (400,000) Depreciation (1,760,000) (840,000) (1,000,000) Head office (960,000) (720,000) (600,000) Other cost (880,000) (240,000) (200,000) Total cost (9,152,000) (6,780,000) (5,680,000) Total profit 1,648,000 5,100,000 8,720,000

Answer 1

Answer 5(a):

BRBC should not stop making bicycle A. Contribution margin of Bike A is $7,520,000. Hence assuming there is no change in volumes or selling prices of other two product lines, the impact of dropping Bike A from the line of products is loss of contribution it is generating i.e. $7,520,000.

Bike A is generating profit of $2,400,000 and is covering fixed cost of $5,120,000. Total of profit and fixed cost equals contribution.

The calculations are as below:

Answer 5(b):

Current contribution of Bike C = $12,800,000

Contribution of Bike C, If price is reduced to $75 per unit and quantity sold increases to (200,000 +20,000=) 220,000 = 220,000 * ($75 - $16) = $12,980,000

As such this strategy will result in incremental contribution of ($12,980,000 - $12,800,000=) $180,000.

Hence it is worthwhile to reduce price of Bike C to $75 per unit.

Answer 5(c):

Contribution per unit of Bike A = $150 - $56 = $94

Contribution per unit of Bike C = $64

As contribution per unit of Bike C is less by ($94 - $64=) $30 per unit, increase in volume of Bike C while decreasing the volume of Bike A by same quantity of 10,000 will result in net loss of Contribution amount = $30 *10,000 = $300,000.

Hence this strategy of change in advertisement focus is not worthwhile.

Answer 5(d):

Impact of reducing price of C to $75 and change of advertisement focus:

Contribution margin that will be lost on reduction of volume of Bike A = $94 * 10,000 = $940,000

Current contribution margin of Bike C = $12,800,000

Post this change contribution margin of Bike C = ($75 - $16) * (200,000 +30,000) = $13,570,000

Increase in contribution margin of Bike C = $13,570,000 - $12,800,000 = $770,000

Hence with this strategy gain in contribution margin of Bike C = $770,000 and loss of contribution margin of A = $940,000. This implies there is a net loss in contribution margin of ($940,000 - $770,000=)$170,000.

Hence this strategy is not worth pursuing.

Answer 6:

If we evaluate strategies proposed from (a) to (d) above, we find only strategy given in strategy (b) is worthwhile executing. Hence the same is recommended. Company should reduce price of Bike C to $75 and increase its sale to 220,000 units.

The income statement is given below: