Financial Analysis Task 4

A1. Costing Method

In order for a company to succeed and be successful, it is very important for the company to understand the difference between profit and cost of goods. There are costing tools that can help a business figure out what the cost of product is during the manufacturing process. These tools are beneficial for a company to figure out how much profit can be made. These tools take the cost of manufacturing the unit and subtract it from the sale price of the product. Having this information, the profit per unit, is very beneficial for a company to know which products they should produce more heavily, or which ones to eliminate. I want to discuss two costing methods that are beneficial to a …show more content…

Cost-volume profit analysis is a process that shows relationships between volume, cost, and profit. By using these relationships you can determine the breakeven point of the company. The breakeven point is when the number of sales will break even, meaning having no loss, or no profit. The first step in cost-volume profit analysis is finding the CM (contribution margin) per unit. The CM is profits is resulted by subtracting sales from variable costs. For Competition Bikes Inc., they have a CM per unit of $111 for CarbonLite, and $221 for titanium. Since Competition Bikes Inc. has two different types of bikes, they are going to have two different CMs. In order to make sense of having two CMs, we can calculate the weighted average contribution margin (WACM) for each unit, based off the CMs combined. To calculate this you add the product of sales mix multiplied by the CM of each of the items, which gives us $127,200. The total of the CMs is divided by the sales mix total, which is 700. This will then give you a WACM of $181.71. This means that each unit that was sold an average of $181.71 was profited. Now you need to calculate the breakeven point from the WACM. You need to divide the WACM by the total mixed cost, which is $400,000. This equals 2201 units. This means that Competition Bikes Inc. needs to sell a total of 2201 units reach the breakeven point. We