Competitive Bikes Inc. Financial Analysis (Essay Sample)

Competitive Bikes Inc. Financial Analysis
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Introduction
Competitive bike Inc. is a company that manufacture bicycle tailored for professional as well as highly regarded riders in bike races. Established by a Larry Ferguson, a former bike race in 2001, the organization was listed after the third year in order to raise more capital. The firm’s main competitor, two wheels racing Inc. manufactures chain driven bicycles. Competitive bike Inc. strictly adheres to standard company procedures in its operation activities. The success of the organization can be attributed to the fact that 6 out of 10 winners of bike racers in the past have been using products from this company. The success can also be linked from the massive advertisement made particularly by its previous customers. The organization also ensures internal control apart from being Sarbanes Oxley compliance.
The organization has two main facilities base in San Diego and Atlanta. Its products are supplied only through selected and prequalified private distributors. The private distributors ensure that products reach to the customer by delivering them to the customer’s physical location by a carrier that is usually selected with regard to its capacity to handle the product as well as its reliability. The organization’s products are not only durable and reliable but also have a light weight bike frame. By the end of the 8th year, the organization share, which is listed at Philadelphia stock exchange, was trading at $3.10 for every share.
Competition bike Inc. need to change their method of costing from activity based costing to traditional based costing. It is used to allocate manufacturing overhead to produce products. Traditional based costing is method used by an organization to determine the cost of an item in relation with the revenue it generates. On the other hand, activity based costing, which competition bikes Inc. should adopt is a method of costing that selects activities in a company and gives the cost of each activity resources to all goods and services with regard to the actual consumption of each activity. This method identifies the cost of every activity and the designate the cost to their respective activity. Activity based costing is a step by step process in which the cost of a product is identified, the total cost as well as manufacturing overhead estimated as well as the cost drivers for every activity and the total quantity for every cost driver designation base. Finally, cost appropriation is calculated for every activity and cost is appropriated to every cost object. When compared with other conventional costs, activity based costing assigns more indirect costs or overhead costs into direct costs. This method of costing enables an organization to view both models; titanium bike and carbon lite, and therefore, Competition bikes Inc. will benefit from it. although the organization already knows that every titanium xl uses $136 as direct labor while as manufacturing overhead is $240 and every carbon lite uses $249 as direct costs while $420 is used as indirect costs, the information provided is not adequate enough for decision making since the model offers quite different price points. Moreover, titanium xl and carbon lite requires different levels of engineering as well as labor requirement yet considering cost needs more than a cursory approach on labor hours as well as machine hours. It is therefore not appropriate to assume that each commodity has a proportionate share of organizations overhead since such assumptions will only result in miscalculations of every product’s real costs of indirect overhead. Applying activity based costing can be helpful since it is not proportional but takes into account the special engineering, machine setups as well as special testing and other costs of activities that make the organization use resources. With activity based costing, the organization will calculate the costs of the resources applied in each of these activities after which the cost of every activity will be allocated to those products that need the activities. This leads to a real determination of the costs of every manufactured product which is important when the demand for the items is so different. For instance, the setup costs for titanium xl is 15 times the setup cost of carbon Lite yet only a single set up is needed for 500 frames while on the other hand, carbon lite uses its own frame (Accoutingexplained, 2013).
Despite the fact that this method is time consuming because off calculating the cost of every product, it offers a much accurate estimate of actual costs for a given activity and in turn generate cash back. Unlike activity based costing, traditional based costing only accounts for indirect costs thus excluding non-manufacturing costs like administrative cost. Therefore, Competition Bikes Inc. will better comprehend the real drivers of particular costs and determine the actual costs of a product at the same time.
Competition Bikes Inc. will be in a position to price their products at the appropriate price in that it will be having the ability to determine current pricing on its products through the application of activity based costing. With traditional based costing, it may knowingly either undercharge or overcharge. An overcharge may scare away potential customers while as a blind undercharge may result to lose of potential revenue. This is because Activity based costing enables an organization determines the actual cost of a product. For instance, some organization offers complimentary products and services; however, upon the application of activity based costing they may realize that the overhead cost they pay out to fund the complimentary feature is a loss of the organization revenue. Therefore, adoption of activity based costing by Competition bikes Inc. will enable it to gain more knowledge as far as organization’s finances and cost savings are concerned. With respect to manufacturing overhead analysis, six products were analyzed and their respective costs determined. Using the traditional based costing, the analysis showed a total off $ 641320 for titanium bikes. On the other hand, there was a total of $ 590320 when activity based costing was used. The traditional based costing for carbon bikes totaled $679830 while that of activity based totaled to $729985. The variation in cost totals could be an indication that there is possible overpricing of titanium bikes by the company and thus pricing higher than the competitor and making the company less of a competitor. By lowering of the price in order to compete better in the market, the company revenue could increase compared to that of the previous years (Accoutingexplained, 2013).
Based on an evaluation of cost-volume-profit, complete the following:
* Analyze the breakeven point for Competition Bikes Inc. with regard to sales units and sales dollars for both Carbon Lite and Titanium bike
In order to avoid cases of making losses, organization uses cost volume profit analysis to determine future levels of operational activity. Break-even point is the point the total revenue equates the total fixed and variable costs. The organization does not make ether profit or loss. It is also therefore referred to as no profit, no loss or zero profit point. Breakeven is determined by fixed cost, sales and variable costs through the following formula; fixed costs/ unit sale-unit variable costs. Break even analysis is a critical tool used to study the relationship between fixed costs, variable costs and profit. It shows the likely time that an investment made will start to generate profit for an organization. It calculates the volume of produced at a particular price that will cover all costs. In this case, the focus is on the profit variations anytime there are sales volume, cost as well as price variations. Cost volume profit comes in handy when an organization is planning its operating activity levels in order to find out the how much sales are required to obtain a given amount of profit. The primary cost volume profit formula is; (profit= total revenue – total costs). The formula is further broken down into fixed and variable components; (profit = total revenue – total variable cost – total fixed costs). To determine the contribution margin, a formula; (total revenue – total variable cost) is used but should be determined as per unit of production that an organization sales (selling price per product – variable cost per product). Thus, the contribution margin of carbon Lite will be (1495 – 1384 = 111) while that of titanium bike will be (900 – 679 = 221). After determining the contribution margin of every unit produced, contribution margin ratio is arrived at through the following formula; (Profit = Price for sold per product x by the quantity units sold – total fixed costs = (Contribution margin per unit) x quantity units sold – total fixed costs. therefore; (Titanium: 99,450 Carbon Lite: 27,750) while as Carbon Lite + 250 x 1495 1384 x 250 651,550; Total $778,750 $651,550 $127,200 ;$900 x $450 $679 x $450 $778,750
Contribution Margin Ratio 127,200 / 778,750 = 0.163
Contribution margin ratio refers to sales revenue above other variable costs. It is determined using the equation (contribution margin per unit = price per unit – variable cost per unit, while the total contribution margin = total sales revenue – total variable cost). As earlier stated, breakeven point is achieved when revenues are equal to total costs. By applying the cost column equation, organizations can determine the breakeven point for products and sales revenue. Competition bikes incorporated as well as other organization can determine th...