Question

2. A bicycle company is considering a range of bicycle offerings to extend its current single range. A year 1 estimate of expanding their bicycle range is as follows:

                                                                        Bicycle 1       Bicycle 2          Bicycle 3

Volume                                                            1,600            1,600                 800

Selling price                                                        $500            $1200               $900

Variable cost/unit                                               $350               $620               $590

Fixed assembly costs                                     $90,000         $136,000        $164,000

Additional information (further fixed costs)

Sales and Marketing $172,000

Administration $190,000

Occupancy & Rent $376,000

Required:

1. Calculate the weighted average contribution margin (WACM) per bike.
2. Determine the break-even level of bikes overall and per bike-type.
3. The company is concerned about the estimates around price volume and costs. The company is thinking about raising the price of Bicycle 1 by 15% with an impact of reducing sales volume by 10%. At the same time, the company would like to try decreasing the price of bicycle 2 by 15% with an increase in sales units of 20%.

What’s the likely impact on planned profits? Show workings. What do you advise?

Show all calculations           

Answer 1

Solution:
Part A :-
Particulers	Bicycle 1	Bicycle 2	Bicycle 3	Total
Volume	1600	1600	800	4000
Salling Price	$500	$1,200	$900
Less : Variable Cost per Unit	$350	$620	$590
Contribution Margin Per Unit	$150	$580	$310
Contribution Margin (Cont. x Vol.)	$240,000	$928,000	$248,000	$1,416,000
Fixed Assembly Cost	$90,000	$136,000	$164,000	$390,000
Sales marketing Cost				$172,000
Adminstration Cost				$190,000
Ocupancy & Rent				$376,000
Total Fixed Cost				$1,128,000
Weighted Average Contribution Margin(WACM) = Total Contribution Margin/ Unit sales
=	$1,416,000/4000
=	$354
Part B :-
Break even Level =Fixed cost/WACM                       =	$1128000/$354
	=	3186 Bicycle
Take note that, the ratio is developed from the ratioof individual sales to total sales.
Bicycle I (500x2)	1000
Bicycle I (1200x2)	2400
Bicycle I (900x1)	900
	4300
Per Bike type BEP =Break even level x Sales Revenue ratio
Break even Level Bicycle 1           =	3186x1000/4300 =	741
Break even Level Bicycle 2           =	3186x2400/4300 =	1778
Break even Level Bicycle 3           =	3186x900/4300 =	667
Part C :-
Raising the price of Bike -1 by 15% and impact will redue the sales by 10%
Price will be                                    =	575
Volume will be                            =	1440
Decrease the price of Bike -2 by 15% and impact will increase the sales by 20%
Price will be                                    =	1020
Volume will be                            =	1920
Particulers	Bicycle 1	Bicycle 2	Bicycle 3	Total
Volume	1440	1920	800	4160
Salling Price	$575	$1,020	$900
Less : Variable Cost per Unit	$350	$620	$590
Contribution Margin Per Unit	$225	$400	$310
Contribution Margin (Cont. x Vol.)	$324,000	$768,000	$248,000	$1,340,000
Particulers	Before Price change	After Price change
Contribution Margin	$1,416,000	$1,340,000
Fixed Cost	$1,128,000	$1,128,000
Net Profit	$288,000	$212,000
My advise is not to change the price becouse it will decrese Net Profit $76,000.