accounting hw

EMBA 612 – Spring 2016

Glacier Peak Cycles

In 2015, Mark Bowman was reviewing production costs for Glacier Peak Cycles. Located in Seattle, Washington, the company sold very high-quality, handcrafted mountain bikes to bicycle retailers throughout the country. Sales for the company were $13 million that year.

Mark Bowman had been an avid cyclist in college, racing for the Stanford University cycling team while completing his degree in mechanical engineering. After working for a few years as a design engineer for a company in Seattle, Mark decided to start his own business. As a hobby, he had designed and built several prototypes of a mountain bike, which had been enthusiastically received by his mountain-biking friends. Approaching several friends and relatives for start-up money, Glacier Peak Cycles was founded in 2013.

A mountain bike is a bicycle with 15 to 21 speeds, designed and built to take the punishment of riding on dirt trails and roads. The bikes were first made by avid cyclists who customized their 10-speed bikes in order to ride on mountain trails and dirt roads. Some with framebuilding experience began to experiment making their own frames in order to better handle the additional demands of off-road riding.

Mountain bikes had taken off in popularity, not only for use off-road but also for use in the city, where their sturdy construction could withstand the pounding from potholes and curbs. In addition, many casual cyclists preferred the mountain bike’s more upright riding position in comparison to that of the hunched position of the 10-speed bike. Sales of all bicycles in the United States had declines in the early 2000s. However, over the same time period, sales of mountain bikes increased to more than 2.0 million units.

Mark Bowman had planned to produce 10,000 bikes in 2015, all of one model. Operations as Glacier Peak Cycles consisted of three departments: frames, wheel assembly, and final assembly. In frames, steel tubing was cut to length for the components of the frame. Then the pieces were carefully welded together to form the completed frameset. This part of the process was quite time-consuming, requiring frequent inspection and measurement to ensure that the frameset was aligned perfectly. After welding, the frame was painted in one of 10 different color schemes and prepared for final assembly.

In wheel assembly, front and rear wheels were assembled from their key components: hubs, spokes, and rims. All of the components were purchased from an outside supplier. Glacier Peak Cycles used a high-quality automatic lacing and truing machine to build its wheels. This machine would lace the spokes between the hub and rim and then automatically tighten the spokes to the appropriate tension. The machine was quite precise but would occasionally damage spokes during the insertion process. In such a case, the operator would replace any damaged parts and restart the machine. Each wheel would also be inspected and trued by hand in order to insure that the wheels were in perfect alignment.

In final assembly, the frame and wheels were combined with other purchased parts to create the final package that would then be shipped to bicycle dealers. In this area, the front form and many other key components were attached to the frame, and the inner tubes and tires were mounted on the wheels. In order to minimize damage while shopping, some of the bicycle’s components were left packaged for the dealer to assemble before selling the bike to the final customer. All of the components were purchased from outside suppliers and then were combined to form kits for the bicycles. Glacier Peak Cycles carried an inventory of spare parts to replace any parts damaged during assembly or shipping, although such replacement was quite infrequent.

In reviewing his costs, Mark notes that he had produced 10,800 bicycles in 2015, 800 more than planned. Mark thought the operations during the year had done well to meet the additional demand, but he wondered if Glacier Peak Cycles was doing a good job in managing its costs. Exhibit 1 shows the planned and actual income statement results for 2015. Exhibit 2 shows the detailed planned material, labor, and overhead costs, and Exhibit 3 shows the detailed actual material, labor, and overhead costs for that year.

Exhibit 1 2015 Preliminary Report on the Results of Operations

Budget (10,000 units) Actual

(10,800 units) Variance

(800 units)

Revenue $ 12,500,000 $ 13,095,000 $ 595,000 F Variable Costs Frame assembly 4,825,000 5,128,337 303,337 U Wheel assembly 1,265,000 1,416,850 151,850 U Final assembly 3,605,000 4,124,600 519,600 U Subtotal 9,695,000 10,669,787 974,787 U Overhead Costs Rent 250,000 250,000 - Office staff 100,000 100,000 - Depreciation 100,000 100,000 - Other costs 750,000 850,000 100,000 U Subtotal 1,200,000 1,300,000 100,000 U Total costs 10,895,00 11,969,787 1,074,787 U Net income $ 1,605,000 $ 1,125,213 $ 479,787 U

Exhibit 2 2015 Planned Production Costs

Budget based on 10,000 bicycles production

Frame assembly: Steel tubing $ 3,300,000 (110,000 lbs. @ $30.00/lb.) Paint 25,000 (1,250 gals. @ $20.00/gal.) Labor 1,500,000 (100,000 hrs. @15.00/hr.) Total frame assembly 4,825,000 Wheel assembly: Parts 1,200,000 (10,000 kits @ $120.00/kit) Labor 65,000 (5,000 hrs. @ $13.00/hr.) Total wheel assembly 1,265,000 Final assembly: Parts 3,500,000 (10,000 kits @ $350.00/kit) Labor 105,000 (7,500 hrs. @ $14.00/hr.) Total final assembly 3,605,000 Overhead costs: Rent 250,000 Office staff 100,000 Depreciation 100,000 Other costs 750,000 (estimated to be 2/3 variable) Total overhead costs 1,200,000 Total annual costs $ 10,895,000

Exhibit 3 2015 Actual Production Costs

Actual based on 10,800 bicycles production

Frame assembly: Steel tubing $ 3,572,100 (113,400 lbs. @ $31.50/lb.) Paint 28,187 (1,375 gals. @ $20.50/gal.) Labor 1,528,050 (100,200 hrs. @15.25/hr.) Total frame assembly 5,128,337 Wheel assembly: Parts 1,317,600 (10,800 kits @ $122.00/kit) Rework parts 25,000 (spokes and rims) Labor 74,250 (5,500 hrs. @ $13.50/hr.) Total wheel assembly 1,416,850 Final assembly: Parts 3,963,600 (10,800 kits @ $367.00/kit) Rework parts 45,000 (miscellaneous parts) Labor 116,000 (8,000 hrs. @ $14.50/hr.) Total final assembly 4,124,600 Overhead costs: Rent 250,000 Office staff 100,000 Depreciation 100,000 Other costs 850,000 Total overhead costs 1,300,000 Total annual costs $ 11,969,787