1 Estimated costs of producing the average Supremo bike (avg unit costs, assuming a constant mix of models) Direct Materials 12 Euros more than the average Bissan bike Direct Labour 20 higher than the average Bissan bike Variable Overhead 50 of Direct Labour Total Fixed Overhead 7 087 500 (the per bike amount depends on production levels) 2 Unit price and annual volume MikRos has guaranteed an order of 24,000 mountain bikes and will pay an average price of EUR325 3 Asset related costs include Pretax cost of funds (interest to finance receivables or inventories) 18,0 Effective tax rate 46,5 4 Assumptions for Supremo related added inventories (average over the year) and cash Required Materials 2 months' supply Work in Process 1,000 bikes, half completed for all cost categories Finished Goods 500 bikes awaiting next truckload shipment to MikRos warehouse Goods in MikRos regional warehouse Two months (on average) production Accounts Receivable Cash tied up due to the net 30 days policy 5 Cetin Ceviz's opinion on the effect on Bissan sales if proposal is accepted Some customers comparison shop for bikes, and some may purchase a challenger bike as a good value purchase My best guess is that our sales over the next year will be about 150,000 bikes a year if we forego the MikRos deal If we accept it, I think we we'll lose about 3,000 units of our regular sales over the year These estimates do not include the possibility that a few of our current dealers might drop our line if they find out we're making bikes for MikRos 1 If Bissan accepts the deal, how many Supremo bikes will be produced each month 2 In order to increase production to satisfy the MikRos demand, Bissan needs to spend more money on things like raw materials and direct labour At any given time, a certain amount of cash will be tied up in production Determine how much extra cash will be needed for this project by breaking the costs down into stages of production as follows (refer to Exhibit B) Assume that 2,000 Supremo bikes are produced every month a) The cost of raw material for two months b) The cost of 1,000 bikes in work in progress inventory (half of all variable costs) c) The cost of 500 finished bikes awaiting shipment to a warehouse d) The cost of two months stock of finished bikes in a regional warehouse e) The total cash tied up in accounts receivable if MikRos's policy is net 30 days f) What is the net additional investment required to produce the bikes (i e the sum of the five parts from above) 3 a) Look at Bissan's Balance Sheet How much cash is currently available to produce the bikes b) Because Bissan does not have enough money to produce the additional bikes, the company will need to borrow money Suppose Bissan borrows 2,200,000 and assume an annual interest rate of 7 How much interest will Bissan need to pay in total next year if the project goes ahead c) Since Bissan will only need to pay this interest amount if they produce the bikes, we can consider it to be another variable cost of production What is the interest amount that would be spent per bike produced d) Assume that the contribution margin for the Supremo is 70 00 without considering this per bike cost of funds Take into account this borrowing expense and report the new contribution margin Assets Liabilities and Owners' Equity Bank Indebtedness Accounts Payable Long Term Loans Payable 1 897 000 879 000 1 191 000 Cash Accounts Receivable Raw Materials Inventory Work in Process Inventory Finished Goods Plant and Equipment (net) 254 000 1 701 000 1 004 000 1 298 000 2 543 000 4 001 000 Total Liabilities 3 967 000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6 834 000 10 801 000 Total Assets 10 801 000 BISSAN BIKE INC Income Statement For the Year End December 31, 2013 Production (Bikes) 150 000 Total Fixed Overhead 7 087 500 Per Bike Fixed Overhead 47,25 Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income 54 750 000 (40 312 500) 14 437 500 (10 950 000) 3 487 500 (1 621 688) 1 865 813 Estimated costs of producing the average Bissan bike (avg unit costs, assuming a constant mix of models) Direct Materials Direct Labour Variable Overhead (50 of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75 Assets Liabilities and Owners' Equity Bank Indebtedness Accounts Payable Long Term Loans Payable 1 897 000 879 000 1 191 000 Cash Accounts Receivable Raw Materials Inventory Work in Process Inventory Finished Goods Plant and Equipment (net) 254 000 1 701 000 1 004 000 1 298 000 2 543 000 4 001 000 Total Liabilities 3 967 000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6 834 000 10 801 000 Total Assets 10 801 000 BISSAN BIKE INC Income Statement For the Year End December 31, 2013 Production (Bikes) 150 000 Total Fixed Overhead 7 087 500 Per Bike Fixed Overhead 47,25 Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income 54 750 000 (40 312 500) 14 437 500 (10 950 000) 3 487 500 (1 621 688) 1 865 813 Estimated costs of producing the average Bissan bike (avg unit costs, assuming a constant mix of models) Direct Materials Direct Labour Variable Overhead (50 of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75

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1. Estimated costs of producing the average Supremo bike (avg. unit costs, assuming a constant mix of models): Direct Materials 12 Euros more than the

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1. Estimated costs of producing the average Supremo bike (avg. unit costs, assuming a constant mix of models):
	Direct Materials	12	Euros more than the average Bissan bike
	Direct Labour	20%	higher than the average Bissan bike
	Variable Overhead	50%	of Direct Labour
	Total Fixed Overhead	7.087.500	(the "per bike" amount depends on production levels)
2. Unit price and annual volume:
MikRos has guaranteed an order of 24,000 mountain bikes and will pay an average price of EUR325.
3. Asset-related costs include:
Pretax cost of funds (interest to finance receivables or inventories)				18,0%
Effective tax rate				46,5%
4. Assumptions for Supremo related added inventories (average over the year) and cash:
Required Materials: 2 months' supply
Work in Process: 1,000 bikes, half completed for all cost categories
Finished Goods: 500 bikes awaiting next truckload shipment to MikRos warehouse
Goods in MikRos regional warehouse: Two months (on average) production
Accounts Receivable: Cash tied up due to the "net 30 days" policy
5. Cetin Ceviz's opinion on the effect on Bissan sales if proposal is accepted:
Some customers comparison shop for bikes, and some may purchase a challenger bike as a good value purchase.
My best guess is that our sales over the next year will be about 150,000 bikes a year if we forego the MikRos deal.
If we accept it, I think we we'll lose about 3,000 units of our regular sales over the year. These estimates do not include
the possibility that a few of our current dealers might drop our line if they find out we're making bikes for MikRos.

1	If Bissan accepts the deal, how many Supremo bikes will be produced each month?
2	In order to increase production to satisfy the MikRos demand, Bissan needs to spend more money on things like raw materials and direct labour. At any given time, a certain amount of cash will be tied up in production. Determine how much extra cash will be needed for this project by breaking the costs down into stages of production as follows (refer to Exhibit B). Assume that 2,000 Supremo bikes are produced every month.
a)	The cost of raw material for two months:
b)	The cost of 1,000 bikes in work-in-progress inventory (half of all variable costs):
c)	The cost of 500 finished bikes awaiting shipment to a warehouse:
d)	The cost of two months stock of finished bikes in a regional warehouse:
e)	The total cash tied up in accounts receivable if MikRos's policy is net 30 days:
f)	What is the net additional investment required to produce the bikes? (i.e. the sum of the five parts from above)
3 a)	Look at Bissan's Balance Sheet. How much cash is currently available to produce the bikes?
b)	Because Bissan does not have enough money to produce the additional bikes, the company will need to borrow money. Suppose Bissan borrows 2,200,000 and assume an annual interest rate of 7%. How much interest will Bissan need to pay in total next year if the project goes ahead?
c)	Since Bissan will only need to pay this interest amount if they produce the bikes, we can consider it to be another variable cost of production. What is the interest amount that would be spent per bike produced?
d)	Assume that the contribution margin for the Supremo is 70.00 without considering this per bike cost of funds. Take into account this borrowing expense and report the new contribution margin.

Assets Liabilities and Owners' Equity Bank Indebtedness.. Accounts Payable.... Long-Term Loans Payable.. 1.897.000 879.000 1.191.000 Cash Accounts Receivable.. Raw Materials Inventory Work in Process Inventory Finished Goods... Plant and Equipment (net)... 254.000 1.701.000 1.004.000 1.298.000 2.543.000 4.001.000 Total Liabilities 3.967.000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6.834.000 10.801.000 Total Assets 10.801.000 BISSAN BIKE INC. Income Statement For the Year End - December 31, 2013 Production (Bikes) 150.000 Total Fixed Overhead 7.087.500 Per Bike Fixed Overhead* 47,25 *Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold. Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income ...... 54.750.000 (40.312.500) 14.437.500 (10.950.000) 3.487.500 (1.621.688) 1.865.813 Estimated costs of producing the average Bissan bike (avg. unit costs, assuming a constant mix of models): Direct Materials Direct Labour Variable Overhead (50% of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75 Assets Liabilities and Owners' Equity Bank Indebtedness.. Accounts Payable.... Long-Term Loans Payable.. 1.897.000 879.000 1.191.000 Cash Accounts Receivable.. Raw Materials Inventory Work in Process Inventory Finished Goods... Plant and Equipment (net)... 254.000 1.701.000 1.004.000 1.298.000 2.543.000 4.001.000 Total Liabilities 3.967.000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6.834.000 10.801.000 Total Assets 10.801.000 BISSAN BIKE INC. Income Statement For the Year End - December 31, 2013 Production (Bikes) 150.000 Total Fixed Overhead 7.087.500 Per Bike Fixed Overhead* 47,25 *Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold. Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income ...... 54.750.000 (40.312.500) 14.437.500 (10.950.000) 3.487.500 (1.621.688) 1.865.813 Estimated costs of producing the average Bissan bike (avg. unit costs, assuming a constant mix of models): Direct Materials Direct Labour Variable Overhead (50% of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75