PAGE 2. Operating income decreased over $4 million in one year even though we sold the same number of bicycles. Over the same period, our contribution margin per bicycle decreased by almost a $1,000. While the average variable cost per bicycle decreased significantly, it was not enough to offset the decrease in our average selling price per bicycle.

Anther member responded, " we have always sold professional bicycles for $5,500 and Novice for $1,000, how is it possible for our average sales price to decrease so drastically in one year without a price reduction?

Sam replied, " That is an excellent question and I thought the same. Our accounting records show that while we continue to produce and sell at capacity 4,500 bicycles, our sales mix shifted drastically. In prior years 70 percent of total sales were generated from professional bicycles. However, this year 70 percent of sales are coming from novice bicycles. The demand for professional bicycles has decreased with a corresponding for novice models.

A. calculate Standard variable cost and contribution margin per bycicleat standard, using atandard cost components and selling price per bicycle

B.salex mix impact: analyze the impact of the shift in sales mix by determining the sales mix variance between 2016 and 2017.

C.Manufacturing variance impact, calculate direct materials (price and usage) direct labor and variable overhead variance for 2017

D. Selling and general administration impact: Preparate an analysis of the impact the increase in selling and administration costs on 2017 operating income

E. operating income reconciliation: Prepare a schedule reconciling operating income from 2016 to 2017 integrating your calculations from items b-d above

F. recommendations: oreoare a professional memo to the partners with your shory and long recommendations on how to improve the company operating income.

Going Postal: Analyzing Operating Income of the Wheels of Fortune The Decision It was a beautiful Saturday morning as Lance completed his ride in the hill country of central Texas. During his ride Lance thought, "What has caused the operating income of Wheels of Fortune to decline so drastically over the last year?" He was concerned that if the trend persisted, Wheels of Fortune, the bicycle assembly and wholesale company he started ten years ago, would cease to exist From the beginning, Wheels of Fortune was Lance's brainchild. At forty, after surviving significant health scare, Lance realized his professional cycling career was nearing an end. Yet,. a he wanted to stay connected to the cycling community he so dearly loved. He reasoned his years of professional cycling experience for the Postal team and firsthand knowledge of the deficiencies in existing bicycle technology uniquely qualified him to build a better bicycle During a ride after another grueling season, Lance mentioned his idea for Wheels of Fortune to his long-time training partners and best friends, Tyler and Sam. "Last week, after Sheryl told me she is expecting our first child and I decided to retire." Tyler a bit surprised asked, "I knew you were tiring of the professional circuit, but I didn't think you were ready to retire. What's next for you?" Lance replied, "I'm going to start a bicycle company called Wheels of Fortune. The company will assemble bicycles to order from retailers. I know it is sudden, but I would like for you and Sam to be my partners. With your knowledge of bicycle assembly and technology, Sam's accounting and procurement acumen, and my sales and marketing appeal, we would form an unbeatable team just like we did on the circuit." The Challenge "Who called this meeting?" a slightly annoyed Tyler queried. "I did," Lance replied. "My apologies, I know how much we all hate meetings, but it could not be helped. Our operating income decreased drastically in the last year. At this rate, we won't be in business much longer if we can't figure out what happened. I asked Sam to generate a comparison of operating income for the past two years." Sam explained, "Our operating income decreased over $4 million in just one year even though we sold the same number of bicycles. Over the same period, our contribution margin per bicycle decreased by almost a $1,000. While the average variable cost per bicycle decreased significantly, it was not enough to offset the decrease in our average selling price per bicycle." Insert Table TN-1 here Lance interrupted, "We have always sold professional bicycles for $5,500 and Novice for $1,000. How is it possible for our average sales price to decrease so drastically in one year without a price reduction?" Sam replied, "That's an excellent question and I thought the same. Our accounting records show that, while we continue to produce and sell at capacity of 4,500 bicycles, our sales mix shifted drastically. In prior years, 70 percent of total sales were generated from Professional bicycles. However, this year, 70 percent of sales are coming from Novice bicycles. The demand for Professional bicycles has decreased with a corresponding for Novice models." top-of-the-line Professional bicycle for ten years. "We've been assembling the same How is it possible that sales shifted so drastically?" Tyler asked. are no longer our Professional bicycles Sam suggested somewhat sarcastically, "Perhaps, considered top-of-the-line." saying the shift in sales was a little put off chimed in, "So you are Lance sensing Tyler mix is the reason for our decreased operating income?" our average selling price "You are partially correct. The shift in sales mix impacted operating income and need to be However, other factors contributed to the decrease in our our variable manufacturing and fixed selling and ,we need to analyze quantified. Specifically,' general administration costs," Sam appraised. we have the data to analyze those costs?" Tyler asked suggesting "Okay. So, you are hopefully complex than "Yes; however, analyzing our variable manufacturing costs is much more our expected or standard costs to assemble a analyzing sales. We need to begin by comparing bicycle with the actual cost to calculate manufacturing variances. Analyzing manufacturing variances will provide insight about spending and the efficiency of our assembly process," Sam explained. "When we started the company, we used the following assumptions to generate standard costs and establish selling prices." Insert Table TN-2 here "So, the direct labor and variable overhead costs are the expected conversion costs to assemble the bicycle kits (direct materials) into a bicycle?" Tyler asked. Sam replied, "Correct. You will notice the direct labor to assemble Professional bicycles expensive on is more than double Novice bicycles. Because the frames and parts are so our most experienced assemblers to that department Professional bicycles, we decided to assign we were forced to transfer idle In addition, as sales of our Novice bicycles increased, Professional assemblers to the Novice line to keep up with demand." Tyler added, "This is the first I've seen this. I am not certain how those changes impact our direct labor costs." "Calculating manufacturing variances can help us determine the dollar impact of those changes and others have on our variable manufacturing costs," Sam affirmed, "I summarized the relevant direct material, direct labor, and variable manufacturing overhead costs in this table. The table shows the actual number of bicycle kits, direct labor hours, and variable overhead costs incurred to assemble 4,500 bicycles last year." Insert Table TN-3 here After reviewing the information, Tyler replied, "It appears you have been keeping track of our actual costs for some time. How come we never calculated manufacturing variances before?" Sam responded, "There was no need. For the first nine years of Wheels of Fortune, the company consistently generated $6 million in operating income. However, now we need to analyze everything including the $150,000 in raises we gave ourselves last year." A concerned Lance asked Sam, "Can you analyze our operating income, so we can make changes? If the trend continues, I might need to be forced to go back to the Postal team and I'm too old and out of shape for that." Sam enthusiastically replied, "Absolutely." Wheels of Fortune Operating Income Statement Bicycles Sold 4,500 4,500 Per Bicycle Per Bicycle 2017 2016 $2,350.00 Sales Dollars 10,575,000 $4,150.00 $ 18,675,000 6,688,000 1,473,120 447 750 8,608,870 S $1,486.22 Direct Material Costs Direct Labor Costs Variable Overhead 10,260,000 1,503,000 540,000 $2,280.00 327.36 334.00 99.50 120.00 1,913.08 12,303,000 S 2,734.00 $ Total Variable Costs $436.92 1,966,130 Contribution Margin Contribution Margin Percent S1,416.00 6,372,000 34.12% 18.59% 136.67 $ 170.00 765,000 615,000 Selling & General Administration $1,279.33 $266.92 5.757.000 1,201.130 Operating Income Wheels of Fortune Summary of Standard Costs Summary of Standard Costs Bicycle Kit per unit Direct labor hours per bicycle Direct labor rate per hour Variable overhead rate per bicycle Novice Professional 600 3,000$ $ 10 40 $ 30 $ 150$ 50 $ EA actual costS Wheels of Fortune Summary of Actual Costs Professional Used Price per kit 2017 Bicycle Kit: 1,400 3,200 S 15,525 Direct labor hours $ 44 Direct labor rate per hour Variable overhead per bicycle $ 180 2017 Novice Bicycle Kit: Used Price per kit 3,200 $ 690 Direct labor hours 20,790 Direct labor rate per hour Variable overhead per bicycle $ 38 $ 65 Going Postal: Analyzing Operating Income of the Wheels of Fortune The Decision It was a beautiful Saturday morning as Lance completed his ride in the hill country of central Texas. During his ride Lance thought, "What has caused the operating income of Wheels of Fortune to decline so drastically over the last year?" He was concerned that if the trend persisted, Wheels of Fortune, the bicycle assembly and wholesale company he started ten years ago, would cease to exist From the beginning, Wheels of Fortune was Lance's brainchild. At forty, after surviving significant health scare, Lance realized his professional cycling career was nearing an end. Yet,. a he wanted to stay connected to the cycling community he so dearly loved. He reasoned his years of professional cycling experience for the Postal team and firsthand knowledge of the deficiencies in existing bicycle technology uniquely qualified him to build a better bicycle During a ride after another grueling season, Lance mentioned his idea for Wheels of Fortune to his long-time training partners and best friends, Tyler and Sam. "Last week, after Sheryl told me she is expecting our first child and I decided to retire." Tyler a bit surprised asked, "I knew you were tiring of the professional circuit, but I didn't think you were ready to retire. What's next for you?" Lance replied, "I'm going to start a bicycle company called Wheels of Fortune. The company will assemble bicycles to order from retailers. I know it is sudden, but I would like for you and Sam to be my partners. With your knowledge of bicycle assembly and technology, Sam's accounting and procurement acumen, and my sales and marketing appeal, we would form an unbeatable team just like we did on the circuit." The Challenge "Who called this meeting?" a slightly annoyed Tyler queried. "I did," Lance replied. "My apologies, I know how much we all hate meetings, but it could not be helped. Our operating income decreased drastically in the last year. At this rate, we won't be in business much longer if we can't figure out what happened. I asked Sam to generate a comparison of operating income for the past two years." Sam explained, "Our operating income decreased over $4 million in just one year even though we sold the same number of bicycles. Over the same period, our contribution margin per bicycle decreased by almost a $1,000. While the average variable cost per bicycle decreased significantly, it was not enough to offset the decrease in our average selling price per bicycle." Insert Table TN-1 here Lance interrupted, "We have always sold professional bicycles for $5,500 and Novice for $1,000. How is it possible for our average sales price to decrease so drastically in one year without a price reduction?" Sam replied, "That's an excellent question and I thought the same. Our accounting records show that, while we continue to produce and sell at capacity of 4,500 bicycles, our sales mix shifted drastically. In prior years, 70 percent of total sales were generated from Professional bicycles. However, this year, 70 percent of sales are coming from Novice bicycles. The demand for Professional bicycles has decreased with a corresponding for Novice models." top-of-the-line Professional bicycle for ten years. "We've been assembling the same How is it possible that sales shifted so drastically?" Tyler asked. are no longer our Professional bicycles Sam suggested somewhat sarcastically, "Perhaps, considered top-of-the-line." saying the shift in sales was a little put off chimed in, "So you are Lance sensing Tyler mix is the reason for our decreased operating income?" our average selling price "You are partially correct. The shift in sales mix impacted operating income and need to be However, other factors contributed to the decrease in our our variable manufacturing and fixed selling and ,we need to analyze quantified. Specifically,' general administration costs," Sam appraised. we have the data to analyze those costs?" Tyler asked suggesting "Okay. So, you are hopefully complex than "Yes; however, analyzing our variable manufacturing costs is much more our expected or standard costs to assemble a analyzing sales. We need to begin by comparing bicycle with the actual cost to calculate manufacturing variances. Analyzing manufacturing variances will provide insight about spending and the efficiency of our assembly process," Sam explained. "When we started the company, we used the following assumptions to generate standard costs and establish selling prices." Insert Table TN-2 here "So, the direct labor and variable overhead costs are the expected conversion costs to assemble the bicycle kits (direct materials) into a bicycle?" Tyler asked. Sam replied, "Correct. You will notice the direct labor to assemble Professional bicycles expensive on is more than double Novice bicycles. Because the frames and parts are so our most experienced assemblers to that department Professional bicycles, we decided to assign we were forced to transfer idle In addition, as sales of our Novice bicycles increased, Professional assemblers to the Novice line to keep up with demand." Tyler added, "This is the first I've seen this. I am not certain how those changes impact our direct labor costs." "Calculating manufacturing variances can help us determine the dollar impact of those changes and others have on our variable manufacturing costs," Sam affirmed, "I summarized the relevant direct material, direct labor, and variable manufacturing overhead costs in this table. The table shows the actual number of bicycle kits, direct labor hours, and variable overhead costs incurred to assemble 4,500 bicycles last year." Insert Table TN-3 here After reviewing the information, Tyler replied, "It appears you have been keeping track of our actual costs for some time. How come we never calculated manufacturing variances before?" Sam responded, "There was no need. For the first nine years of Wheels of Fortune, the company consistently generated $6 million in operating income. However, now we need to analyze everything including the $150,000 in raises we gave ourselves last year." A concerned Lance asked Sam, "Can you analyze our operating income, so we can make changes? If the trend continues, I might need to be forced to go back to the Postal team and I'm too old and out of shape for that." Sam enthusiastically replied, "Absolutely." Wheels of Fortune Operating Income Statement Bicycles Sold 4,500 4,500 Per Bicycle Per Bicycle 2017 2016 $2,350.00 Sales Dollars 10,575,000 $4,150.00 $ 18,675,000 6,688,000 1,473,120 447 750 8,608,870 S $1,486.22 Direct Material Costs Direct Labor Costs Variable Overhead 10,260,000 1,503,000 540,000 $2,280.00 327.36 334.00 99.50 120.00 1,913.08 12,303,000 S 2,734.00 $ Total Variable Costs $436.92 1,966,130 Contribution Margin Contribution Margin Percent S1,416.00 6,372,000 34.12% 18.59% 136.67 $ 170.00 765,000 615,000 Selling & General Administration $1,279.33 $266.92 5.757.000 1,201.130 Operating Income Wheels of Fortune Summary of Standard Costs Summary of Standard Costs Bicycle Kit per unit Direct labor hours per bicycle Direct labor rate per hour Variable overhead rate per bicycle Novice Professional 600 3,000$ $ 10 40 $ 30 $ 150$ 50 $ EA actual costS Wheels of Fortune Summary of Actual Costs Professional Used Price per kit 2017 Bicycle Kit: 1,400 3,200 S 15,525 Direct labor hours $ 44 Direct labor rate per hour Variable overhead per bicycle $ 180 2017 Novice Bicycle Kit: Used Price per kit 3,200 $ 690 Direct labor hours 20,790 Direct labor rate per hour Variable overhead per bicycle $ 38 $ 65