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1. Activity based costing provides a more accurate overhead cost position.

2. Activity Based Costing gives valuable information to management on operations that add value and those that do not. ABC is instrumental in capital investments, pricing, organizational change and product mix.

3. Activity Based Costing can more easily identify production activities and resources.

4. Activity Based Costing has been proven for being effective in controlling costs, improving profits and productivity. This is an example of not reinventing the wheel. ABC works.

Concerning directly to Competition Bikes, inc. – utilizing Traditional Cost accounting the Titanium units cost was $239,020 but utilizing Activity Based Costing, the cost of was $232 380.

The traditional costing method analysis shows the titanium frame cost $713. The ABC method analyses shows the titanium unit at $656.

To summarize and support the implementation of the ABC method to replace the traditional method for Competition Bikes, inc. is primarily because the traditional method uses a percentage of the total and ABC method uses details of only the precise activities needed for individual products.

Our product line is comprised of primarily the titanium line - 900 or 65 percent of our product sales and our carbonlite line is 500 of our product sales or 35 percent. The titanium line is 50.7 percent of our manufacturing overhead and the carbonlite is 49.3 percent. Under the traditional method the titanium is 48.5 of our total cost and the carbolite is 51.4 percent of our total cost. Under the ABC method, the titanium is 44.7 percent and the carbonlite is 55.3 percent.The ABC method is more precise. We see that the Carbonlite is only 35 percent of our sales but is 55 percent of our total expenses

This change in methodology brings exact activities into consideration. In quality control for the titanium line we spend only $2, 104 but for the carbonite quality control we spend $116,896. In engineering services, the titanium line we spend $12,500 and in the carbonlite line we spend $62,500.

It is common knowledge that if a company’s fixed and variable expenses increase then the end product must increase in price. If the company is forced to increase their fixed costs by $50,000 and if vendors increase material costs by 10 percent. Competition Bikes, inc. must increase their per unit sales price to achieve the same breakeven point. This may be avoided if the company negotiates a decrease in supplies for the purchase of a higher quantity, They must be careful to not end up with excess inventory at year end.

Cost-volume-profit ( CVP ) is utilized to analyze how an increase in raw materials and reduced production can negatively affect a company. A CVP analysis must include sales, administrative costs and manufacturing costs. These expenses should be labeled variable or fixed.

· Sales price per unit is constant per schedule- fixed.

· Variable costs per unit are fixed and constant.

· Total fixed costs are fixed an constant.

· Assuming everything produced is sold.

· The affects of costs are only because of activity changes.

· All products produced by a company are sold in the same mix

Example of utilizing the CVP. When the fixed costs are increased by $50,000 and with an

increase of 10 percent in raw materials, the results for Competition Bikes inc., the contribution profit margin for the Titanium line went from $ 221 to $ 191. The Carbon Lite went from $111 to $44.

The weighted breakeven was $690 but increased to $871 for Competition Bikes, inc. due to the $50,000 over head cost and the 10 percent materials increase. With the decrease in contribution profit sales price, obviously they must increase sales price and / or increase sales volume. If we increase our over head an additional $50,000 and we have an additional increase of 10 percent of raw materials our new breakeven point on sales will be 3254 more units. Nearly a 50 percent increase.

The cost profit tab shows with the increases in the $ 50,000 overhead and 10 percent product increase, the Titanium sales price goes to $1415 from $900, the variable cost goes to $709.30 and the contribution margin drops to $191 from $221. The carbonlite price at $1,495, the variable costs goes to $ 1,451 with only a contribution margin profit of $44 from $111. The sales weight average contribution margin per unit is $138 from $181.71. We need to sell 2092 titanium models and 1162 carbonlite models.

With the $50, 000 increase and only a weighted average of $138 from $181 – this

requires an additional sale of 362 units.

In summary, with both of these increases, we will have to increase our sales from 2201 to 3254.