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 flat MTB sport disc MTB sport

sales price $500 $600 $370 $300

variable cost-manufacturing 260 280 175 140

selling and administration 90 120 75 62

Required:

Part-A: Mr. Kahlil David (the owner of KDC) has asked you to answer the following questions, as part of the consultancy work, to help find comprehensive solution as a team. (Treat each requirement independently and show details of your computations and explain the results). This part will be completed in group and the answer be presented in one file and should be uploaded on to Moodle. (Total 14 Marks)

1.Prepare contribution approach income statement for Reid cycles-Werribee Store and determine the total budgeted net profit for the year 2021.

2.How many bicycles of each type must be sold during 2021 in order to breakeven; assuming sales mix remains constant.

3.Answer the following questions for Reid cycles-Werribee Store and interpret the results:

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.

Part-B: After completion of Part-A, Mr. Kahlil David has asked members of your team to answer the following questions individually. Answer for this part should be compiled in a separate file and uploaded independently by each student.

Mr. Kahlil David has asked that each person conducts analysis on the basis of the following changes. Reid cycles-Werribee Store expects that salary of store managers as well as rental contract of its premises would be expected to increase by mid-2021 by a total amount of $30,000. This situation will directly affect fixed costs of the store. It is expected that budgeted sales volume will decline by 10%, but selling price per bicycle and all variable costs will remain the same during 2021.

a.Taking into accounting the decline in projected sales volume and increase in fixed costs, determine how many bicycles of each type should Reid cycles-Werribee Store produce and sell in order to breakeven in the year 2021.

b.Assume that Reid cycles-Werribee Store has the possibility of producing and selling a total of 14,000 bicycles and that the maximum demand for each type of bicycle could reach 4,000 for 2021. How should Reid cycles-Werribee Store adjust its budgeted sales quantity per bicycle for 2021 in order to achieve maximum profit by changing its sales mix? Provide adequate explanation for your answer. (Hint: you are expected to come up with proposed sales mix for each product along with your answer.) If demand of bicycles is expected to fall by 10% from 14,000 in 2022; what do you advise the management of Reid Cycles to consider for the operations of Reid cycles-Werribee Store beyond 2021? Explain the reason behind your advice.