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Guan, Jingxin (Crystal) Paper Assignment 2 - ... By Jingxin (Crystal) Guan

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1 Paper Assignment 2 - The Michelin Company Jingxin (Crystal) Guan California Institute of Advanced Management ACC501-2: Accounting for Decision Making Dr. Andress Walker August 6, 2021 2 Introduction The Michelin Company is a French multinational tire manufacturing company. The company manufactures the Michelin tires together with other companies such as Kleber tires company, Uniroyal-Goodrich Tire Company, SASCAR, Bookatable, and Camso brands (Daries & Cristóbal-Fransi, 2021). In addition to tire manufacturing, the company also has red and green travel guides, roadmaps, and Michelin stars. The types of tires manufactured by the company include their inventions, such as removable tires, the pneurial, and radial tires. Michelin's tire market targets space shuttles, aircrafts, automobiles, heavy equipment, motorcycles, and bicycles. The company deals with manufacturing and distributing its products, as Daries and Cristóbal-Fransi (2021) stated. It has nine research and development centers globally. This works with 117 production sites in 26 countries. This shows the country is widely distributed in the world, ensuring availability on all the continents. To achieve this, the government has achieved external growth

through numerous production companies in different countries and mergers and acquisitions, as explained by Miltenburg (2015). The company also hires and relies on dedicated teams with significant expertise in production, marketing, research, development, and sales. The company has excellent observation and respect for values and respect of required ethics in their field. This is seen in their care for their customers and the environment. The company produces high-quality products and effective services made even better by the customer and environmental-focused innovations (Miltenburg, 2015). The company has also created a mutual relationship with its employees, industrial and commercial partners, local communities, and customers. Furthermore, the company 3 delivers pertinent information on the company reports and financial statements, showing its respect for the shareholders. The company has an environmental management system at all its production sites, ensuring that the company practices are environmentally friendly and participate in environmental sustainability (Miltenburg, 2015). Furthermore, through its research and development, the company has produced tires efficient and end-of-life recycling solutions. The company’s guiding principles demand objectivity and honesty, ensuring that it upholds ethics in its environment (Miltenburg, 2015). The ethics act to guide its employees and everyone in ensuring they act accordingly. The company charter advocates its values and principles together with requiring all the employees to act responsibly. Company boards also communicate the values to the employees, which serve as a constant reminder of their required conduct. Other values the company upholds include confidentiality by the employees where they are not required to release company information and data to the public and competitors. The sales department also practices confidentiality where customer data and partners are only accessed by authorized employees. This acts to create trust in the company. The company also ensures compliance with the laws and regulations put in place by the various governments. This is crucial for its survival in international competition. The global market requires the company to comply with all the countries it operates laws (Miltenburg, 2015). The company has no record of corruption, irregularities, or other forms of cheating such as conflict of interest, donations and political contributions, 4 and discrimination and harassment. This proves its good record both as a company and its employees. Cost Method Analysis for the Michelin Company Michelin Company uses the activity-based costing method to calculate manufacturing costs (Miltenburg, 2015). In this method, the company distributes its overhead activities cost to the products and services it produces and delivers. As a result, a relationship is developed between the costs, overhead activities, and products related to or services. This relationship is used in determining the actual cost of production of the products and services. Methodology – Activity-Based Costing (ABC) The following steps are used in calculating the cost of production for the Michelin Company using activity- based costing. First, according to Michelin & Foucard (2013), all the support activities are identified, their associated costs, and the factors that affect those costs. Next, an activity cost pool is established for each activity for every tire dynamic. Each pool has allocated the total cost associated with each of its activities. The relevant cost input is used to calculate the per-unit cost of each tire type. The total amount in each pool is divided by the estimated unlimited usage of the activity to get the activity rate. Then the cost of that specific product results from the activity rate multiplying the allocated activity base per unit. According to Michelin & Foucard (2013), considering two standard and custom products, the per-unit overhead cost is shown in Table 1. The total overheads are calculated by adding all the overhead costs per unit. 5 Table 1 Factory overhead rates for standard and custom product Standard Product Custom Product Overhead Rate Set up

costs € 0.10 € 6.52 Special part handling cost € 1.06 € 4.26 Customer invoicing cost € 0.40 € 2.12 Material handling cost € 0.27 € 5.33 Other overheads € 4.09 € 5.11 Total overhead cost per unit € 5.92 € 23.34 Table 2 shows the total cost for the Michelin Company. The total cost for the products is obtained by adding the indirect and direct costs of the products separately. Table 2 Total cost per unit for standard and custom product Standard Product Custom Product Direct costs per unit Labor hour*labor rate € 16.00 € 20.00 Material € 22.00 € 32.00 Indirect costs Overhead rate - ABC € 5.92 € 23.34 Total cost per unit € 43.92 € 75.34 With the cost of production determined and the selling price set, the expected profit can be calculated as shown in Table 3. Table 3 Expected profit for standard and custom product 6 Standard Product EUR per Unit Custom Product EUR per Unit Selling price € 65.00 € 86.00 Total cost € (43.92) € (75.34) Profit € 21.08 € 10.66 ABC Method Analysis The activities-based costing method is the most suitable as it considers all the costs involved in the product production process from the acquisition point to the end of sales, accounting for the company assets used (Fodili, 2018). In addition, the company has several products, and the method is vital in showing the individual performance of each product (Kaplan & Anderson, 2007). This results in actual profit per unit of the product being obtained. The ABC method also has the advantage that it helps control the inefficient allocation of costs to products (Fodili, 2018). Thus, this method assists in identifying where improper cost allocation has been done and can be used to regulate it. In addition, this method helps identify which product to improve or how to improve the production process to reduce cost while increasing the profit without affecting the selling price, as stated by Kaplan & Anderson (2007). The ABC method is also suitable when determining which product to produce more and which product to make less or stop production (Fodili, 2018). This is determined by the profit obtained from the products. New Product Launching Assume Michelin is about to release a new product. To break even on the new product line, how many units must be sold? Table 4 shows the given conditions and assumptions for the break-even analysis. According to Michelin’s 2020 Annual Results 7 (2021) and its 2020 Income Statement (2021), the annual profit was €1,887 million before taxes, costs of goods sold (COGS) was €14,841 million and therefore, the contribution margin per unit is calculated in Table 4. Table 4 Conditions and assumptions in Millions (€) Assumption Target Profit € annual profit (before 157 taxes)* 1/12 Fixed cost € the annual cost of goods 5,936 sold*40% Contribution margin per unit € 20 Calculating the sales volume required to achieve the target profit: 𝑅𝑎𝑘𝑎𝑎𝑘 𝑃𝑘𝑘𝑎𝑖𝑘 + 𝐹𝑖𝑥𝑎𝑎 𝐵𝑘𝑘𝑘 €157 + €5,936 (× 106) 𝑅𝑎𝑘𝑘𝑖𝑘𝑎𝑎 𝑅𝑘𝑖𝑘 𝑅𝑎𝑘𝑎 = = 𝐵𝑘𝑘𝑘𝑘𝑖𝑎𝑘𝑘𝑖𝑘𝑘 𝑀𝑎𝑘𝑎𝑖𝑘 𝑘𝑎𝑘 𝑅𝑘𝑖𝑘 €20 (/ 𝑘𝑘𝑖𝑘) = 304,650,000 𝑘𝑘𝑖𝑘𝑘 The sales volume required to break even: 𝐵𝑘𝑎𝑎𝑘 𝑎𝑘𝑎𝑘 𝑘𝑘𝑖𝑘𝑘 𝑖𝑘 𝑘𝑘𝑖𝑘𝑘 = 𝐹𝑖𝑥𝑎𝑎 𝑎𝑘𝑘𝑘 = €5,936 (× 106) 𝐵𝑘𝑘𝑘𝑘𝑖𝑎𝑘𝑘𝑖𝑘𝑘 𝑘𝑎𝑘𝑎𝑖𝑘 €20 (/ 𝑘𝑘𝑖𝑘) = 296,800,000 𝑘𝑘𝑖𝑘𝑘 8 References Compagnie Generale des Etablissements Michelin Annual Income Statement. (2021). Wall Street Journal Market. https://www.wsj.com/market- data/quotes/MGDDF/financials/annual/income-statement Daries, N., & Cristóbal-Fransi, E. (2021). Michelin stars shine brightly, but are they profitable? International Journal of Gastronomy and Food Science, 100352. Fodili, S. (2018). The use of accounting information in the strategic decision- making process (The case of a group of Algerian companies). Kaplan, R. S., & Anderson, S. R. (2007). Time-driven activity-based costing: A simpler and more powerful path to higher profits. Harvard Business Press. Miltenburg, J. (2015). Changes in manufacturing facility-, network-, and strategy-types at the Michelin North America Company from 1950 to 2014. International Journal of Production Research, 53(10), 3175-3191. Michelin, & Foucard, D. (2013, October 2). Michelin’s Manufacturing Strategy [Slides]. https://www.michelin.com/documents/investor-day-d-foucard-lexington-

investor- presentation/ 2020 Financial Performance. (2021, April 13). Michelin. https://www.michelin.com/en/annual-report/financial-performance/