Competition Bikes, Inc. | Management Accounting

Competition Bikes, Inc. makes bicycles for professional and other highly accomplished riders who compete in bike races, biathlons, and triathlons.

Sixty percent of all race winners have been victorious using a Competition Bikes, Inc. bicycle when at least ten percent of the entrants were also using a Competition Bikes, Inc. bicycle. This extraordinary success rate consistently is a topic of conversation among racers and this word of mouth advertising has been effective in promoting sales. The company also uses these statistics to promote sales, although its advertising efforts have been quite limited.

 

The Main Competitor

Two Wheel Racing, Inc. is the only other manufacturer that offers a competitive product in this market space. Their product weighs only a few ounces more than the bikes made by Competition Bikes, Inc. but Two Wheel Racing builds a chain driven product. Two Wheel Racing, Inc is also a publicly traded company. Their financial ratios are provided for comparison and analysis.

 

THE COMPANY AND ITS CENTRAL OPERATIONS

 

Ownership History:

Larry Ferguson formed the company in 2001 in his garage. An avid racer, Larry often heard comments from other riders about how heavy and unreliable their bikes were. Larry identified and sought to remedy this market niche by creating a specialized product that would satisfy the needs of racers. His new company also proved to be a vehicle for financial success.

 

Early success prompted Larry to take the company public after three years in order to acquire sufficient capital to build the two current manufacturing facilities. His bikes enjoyed high demand and good profit margins. Larry continues to be the CEO of the Competition Bikes, Inc. and retains a 40% interest of company shares.

 

Standard Company Procedures for Operations

Each of the manufacturing locations for Competition Bikes, Inc. uses operating procedures based on department and function, as applicable. The following is an excerpt from the operating manual that outlines the process used to order and receive component parts. "The purchasing department will issue a purchase order to the supplier based on the monthly budget projections. Purchasing checks with three sources for similar quality materials and selects the low bidder from the three. The purchase order is sent to the supplier by the Purchasing Department on the first of the projected month. Upon receipt of the goods they will be brought to the production line for use during the month. Any unused parts are sent to

the raw materials inventory stores on the last day of the month. Purchasing sends the supplier's invoice to accounting and accounting writes a check to pay the invoice. "

 

Competition Bikes, Inc. is required to conduct an annual audit since the company shares are traded on the Philadelphia Stock Exchange. The following excerpt was printed in the last annual report issued by the auditors to the shareholders. "A material weakness is a control deficiency or a combination of control

deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis."

 

Sarbanes Oxley Compliance

Management is responsible for ensuring the internal control processes prevent material misstatements from being reported in the financial statements. They also must provide a Report on Internal Control that is published in the annual report. The following excerpt from the Competition Bikes, Inc. year end report indicates no material weaknesses existed. "The management of Competition Bikes, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Competition Bikes, Inc. internal control system was designed to provide reasonable assurance to the company's management and board of directors regarding the preparation and fair presentation of published financial statements.

Competition Bikes, Inc. assessed the effectiveness of the company's internal control over financial reporting as of December 31, Year 8. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework. Based on our assessment we believe that, as of December 31, Year 8, the company's internal control over financial reporting is effective based on those criteria."

 

MANUFACTURING LOCATIONS, DISTRIBUTION, AND PRODUCTS

 

Locations

Competition Bikes, Inc. currently has facilities in two locations. Company headquarters are in San Diego, CA. There are two manufacturing facilities: one in San Diego and the other is located in an Atlanta, GA suburb. With qualified employees in each location the company has sufficient redundancy to handle a short-term increase in production if one of the locations has too many orders to adequately supply customers while maintaining high customer service standards.

 

Distribution Network

Competition Bikes, Inc. currently markets its bicycles through selected, pre-qualified privately owned distributorships. Each manufacturing facility services a group of authorized distributors that were selected to ensure that 95% of the U.S. population is properly served. Each distributor works directly with local specialty bicycle retailers. All product orders are checked and submitted to the factory through one of the distributors.

 

Product Delivery:

All bikes are conveniently delivered to the customer's ordering location by a common carrier chosen for its reliability and superior handling of the product. Competition Bikes, Inc. has a contract with the carrier. The contract includes a large financial penalty for any damages to delivered orders.

 

Product Line

Competition Bikes, Inc. aims to provide the most durable, reliable, light weight bike frame and component set possible. Competition Bikes, Inc. realizes that other companies make great components so their research and development department licenses these products and makes improvements where necessary to lighten the component. Care is taken to ensure that durability and reliability are maintained. The current product, CarbonLite, is a light weight, customized bike built based on the customer's unique physical attributes. CarbonLite was also the first bicycle to offer drive shaft technology. Local distributors who represent Competition Bikes, Inc. are responsible for properly measuring the rider and placing the order with the factory. Some distributors allow their bicycle shop retail outlet clients to do their own measurements but the distributor is contractually committed to the order once it is placed. The factory constructs the bike frame according to these measurements and adds the approved braking, gearing, and other miscellaneous components as specified in the order. Each bike is completely built at the factory. Quality control checks are conducted, and each new bike is test ridden to fully check all functional attributes of the product prior to shipment to the distribution network.

 

MANUFACTURING COSTS

CarbonLite Production Standards

Direct materials:

Each bike frame requires an average of 42 (2 as a production scrap allowance) carbon strips which cost $9/strip. The component package costs $275.

 

Direct Labor:

Each bike requires a total of 15 hours of direct labor. The average $20 labor costs are relatively high due to the high skill level required in manufacturing the product. Retention of the quality labor force has not been a problem.

 

Variable Manufacturing Overhead:

Variable manufacturing overhead is currently applied at $94.529/unit.

 

Task 4

(For Task 4 it is assumed that Competition Bikes, Inc. has acquired the Titanium technology of Canadian Biking. Your decision might not agree with this assumption.) Competition Bikes, Inc. has retooled and is making both the CarbonLite and the Titanium frame bikes for a number of years. The company vice president has directed that a cost study be conducted and an activity-based costing analysis has been undertaken in one of the company plants. After this study was completed there was a breakeven analysis

completed along with target profit projections.

The Excel workbook for the Competition Bikes, Inc. tasks includes the overhead analysis and costing information.

 

The Requirements for Task 4

1. Recommend whether the company should change its costing method to activitybased costing.

2. Based on an evaluation of cost-volume-profit, complete the following:

 

a. Analyze the breakeven point for Competition Bikes Inc. with regard to sales units and sales dollars for both CarbonLite and Titanium bikes.

b. Describe what would happen to the breakeven analysis if company management needed to add $50,000 in fixed costs to the production facility and the direct materials had a 10% cost increase.

 

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