Mr. Kahlil David is an accounting graduate, who started a small accounting firm known as KD Consulting (KDC) in Geelong. He is recruiting fresh graduates and offers internship program to accounting students to work in his consultancy projects. He approached CIC Higher Education to offer graduating students a chance to participate in part-time consultancy jobs. The internship program requires students to form groups and work under the leadership of a senior consultant from KDC. The consultant provides guidance to students on how the consultancy work of a given client should be completed. Students enrolled in Management Accounting are given a chance to participate in the internship program. KDC will give pocket money to participants and expects that students will apply the methods and techniques they learnt in the project they are assigned to work. Each student group will be given detailed information of a random client firm so that they can conduct analysis of the situation and come up with reasonable solution(s) for existing business problems. Students are also expected to critically evaluate the impact of anticipated changes in the business that includes cost structure, product mix and firm performance.

Your team is offered to work on a project drafted by REID Cycles that is intending to open a new bicycle retail shop in Werribee (https://www.reidcycles.com.au/). Reid Cycles is founded by James Reid that began operations in 2009; with the sole intention of providing Australia's best value bikes. The firm does this by cutting out the middle men and selling high quality bikes direct to the public. Designed by Australians for Australians; Reid creates trends by combining fashion, function and quality. From humble beginnings in 2009, selling Reid bikes from the garage of James Reid, the firm now has an online web-store and retail stores in 5 major cities in Australia. In 2013, the firm sold its first bike internationally to its Switzerland distributor. To this day Reid bikes are ridden by over 400,000 Australians. Today, Reid bikes are available in more than 20 countries around the world. Bicycle sales have drastically increased during the COVID-19 pandemic period as lock-down measures were put in place and many workplaces moved to online and others shut down. Staying and working from home has motivated people to engage in daily exercise either by walking or cycling. Given the opportunity, Reid has considered various options to expand its market share. The proposal to open a new store in Werribee is part of this expansion plan. The project indicates that the initial phase will focus on securing a store, hiring retail workers and start by introducing two types of bicycles: Road Bikes (Express and Osprey Flatbar) and Mountain Bikes (MTB Sport Disc and MTB Sport). Reid has a plan to open the store in January 2021.

The proposed budgeted sales volume for 2021 includes 320 Express bikes, 400 Osprey Flatbar bikes, 380 MTB Sport Disc bikes and 500 MTB Sport bikes. Budgeted annual fixed manufacturing costs are $109,005 and fixed selling and administrative costs are $58,695. The income tax rate applicable for the business is 30 per cent. Additional budgeted per unit data for the four types of bicycles is presented below.

Express Osprey Flatbar MTB Sport Disc Mtb Sport

Sales Price $500 $600 $370 $300

Variable cost-manufacturing $260 $280 $175 $140

Variable cost- selling & admin $90 $120 $75 $62

Question:

a. Calculate the projected safety margin in units for the year 2021 and explain the importance of this information for Reid cycles-Werribee Store.

b. If the rate of community transmission and the rate of infections from COVID-19 are put under control, then business may re-open fully and people may go to their work place. Thus demand for bicycles might fall by 10% during 2021 and Reid cycles-Werribee Store may not achieve its budgeted sales target for the year. Assuming sales price of each bicycle remains the same; re-compute safety margin for each bicycle and assess the riskiness of each product line for the year 2021 and interpret the results of your computations.