Question

Week 5 Project

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 of 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.

Answer 1

1	Process Costing is used in process industry like cement,steel etc,where direct materialsgo through continous or batch process
	This case, job costing will be better than process costing
	Activity based costing willgive more accurate cost information than job costing
	Activity based costing will be most suitable for this industry
2	Profitability if volume increases by 10%:
	Standard costs	Bicycle A	Bicycle B	Bicycle C	Notes
	Volume in units(with 10% Increase)	88000	132000	220000
	Per unit:
	Sales price	$150	$110	$80
	Direct costs:
	Materials	$   17.00	$    10.00	$       7.00	NoChange
	Labor	$   21.00	$    16.00	$       4.00	No Change
	Subtotal	$   38.00	$    26.00	$     11.00	NoChange
	Indirect costs:
	Supplies	$     7.00	$      2.00	$       1.00	NoChange
	Labor (Variable Part)	$     5.00	$      4.00	$       2.00	1/2of budgeted labor cost per unit
	Labor(Fixed Part)	$     4.55	$      3.64	$       1.82	(1/2of budgeted labor cost per unit)/1.1
	Supervision	$     7.27	$      2.73	$       0.91	(Budgeted cost per unit)/1.1
	Energy(Variable part)	$6	$3	$2	1/2of budgeted energy cost per unit
	Energy(Fixed Part)	$     5.45	$      2.73	$       1.82	(1/2of budgeted energy cost per unit)/1.1
	Depreciation	$   20.00	$      6.36	$       4.55	( budgeted depreciation cost per unit)/1.1
	Head office support	$   10.91	$      5.45	$       2.73	( budgeted headoffice allocation cost per unit)/1.1
	All other	$   10.00	$      1.82	$       0.91	( budgeted cost per unit)/1.1
	Subtotal	$   76.18	$    31.73	$     17.73
	Total product cost	$ 114.18	$    57.73	$     28.73
	Product-line profitability	$35.82	$52.27	$51.27
3	Profitability if volume decreases by 10%:
	Standard costs	Bicycle A	Bicycle B	Bicycle C	Notes
	Volume in units(with 10% Increase)	72000	108000	180000
	Per unit:
	Sales price	$150	$110	$80
	Direct costs:
	Materials	$   17.00	$    10.00	$       7.00	NoChange
	Labor	$   21.00	$    16.00	$       4.00	No Change
	Subtotal	$   38.00	$    26.00	$     11.00	NoChange
	Indirect costs:
	Supplies	$     7.00	$      2.00	$       1.00	NoChange
	Labor (Variable Part)	$     5.00	$      4.00	$       2.00	1/2of budgeted labor cost per unit
	Labor(Fixed Part)	$     5.56	$      4.44	$       2.22	(1/2of budgeted labor cost per unit)/0.9
	Supervision	$     8.89	$      3.33	$       1.11	(Budgeted cost per unit)/0.9
	Energy(Variable part)	$6	$3	$2	1/2of budgeted energy cost per unit
	Energy(Fixed Part)	$     6.67	$      3.33	$       2.22	(1/2of budgeted energy cost per unit)/0.9
	Depreciation	$   24.44	$      7.78	$       5.56	( budgeted depreciation cost per unit)/0.9
	Head office support	$   13.33	$      6.67	$       3.33	( budgeted headoffice allocation cost per unit)/0.9
	All other	$   12.22	$      2.22	$       1.11	( budgeted cost per unit)/0.9
	Subtotal	$   89.11	$    36.78	$     20.56
	Total product cost	$ 127.11	$    62.78	$     31.56
	Product-line profitability	$22.89	$47.22	$48.44
4	Per unit variable cost remains constant ,with change in production volume
	Fixed cost per unit decreases with increase in production volume
	Hence Profit per unit increases with increase in volume
	Fixed cost per unit increases with decrease in production volume
	Hence Profit per unit decreases with decrease in volume