Competition Bikes, Inc. Costing Method and CVP Report

A1. Costing Method Recommendation

This report has been prepared to analyze the current costing method at Competition Bikes, Inc. (CBI) and provide a recommendation for improvement. To support this analysis, the differences between traditional based costing and activity based costing will be examined, along with the benefits and drawbacks for each method. A cost-volume-profit evaluation with break-even analysis for both sales units and sales dollars for the CarbonLite and Titanium bike lines will also be provided.
The main differences between activity-based costing and the traditional costing:
Traditional costing includes both direct and indirect components. Indirect costs …show more content…

CBI had underestimated manufacturing overhead for the Carbonlite line by 18% using traditional costing. Looking at unit costs, the traditional method per unit cost is $1,359, while the ABC unit cost is $1,460. The unit cost calculated using ABC costing was higher than CBI had realized; they are likely underpricing this bike, losing out on potential revenues. A review of competitors’ prices may be in order, to evaluate what the market will bear, as well as an analysis of the impact of raising prices and how that affects sales. Once they have this data, CBI management can make an informed decision whether or not to adjust the Carbonlite sales price, and by how much.

A2a. Cost-volume-profit and break-even point evaluation: Current scenario
CVP Analysis:
Cost-volume-profit (CVP) analysis is a tool that managers and businesses often use to estimate future levels of operational activity needed to avoid financial losses, to break even, and to generate a profit. This analysis also helps to target future revenues. CVP analysis can also be used to estimate production levels needed to generate revenues sufficient to recoup capital expenditures such as operational expansion. CVP analysis examines changes in profits in response to changes in sales volumes, costs and prices.
The basic CVP equation is sales minus variable costs = contribution margin.
Sales revenues per unit for the Titanium product are set at $900. The variable cost