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Brief_1.doc Rate 5 more documents to earn a free unlock i Helpful 1' Unhelpful 1:1. Is this document missing answers? : . . . 121 Get Answers Get FREE answers and explanations from our Expert Tutors In as fast as 15 mInutes Prepare a report that answers the following questions and include all calculations used to reach your answer. 1. Please prepare a summary of the main issues facing this company as per the case. View answer and explanation V (10 marks) 2. Calculate the full cost for each bicycle model (Meteor and Moonlight) based on: a. Plant wide overhead rate b. Departmental cost centre rate (traditional method) c. Activity Based Costing (ABC) ' - - A solution to this question has been requested by another student. it will be ready shortly. (30 marks) Pricing, Sales and Profitability To ensure profitability and efficient allocation of resources, the company uses a cost-plus pricing policy based on variable cost. At present, there are two key issues facing the company. First, one of its entry-level bike - the Meteor model - has suffered falling sales. It retails for E840. A growing number of potential customers seem to be choosing competitor's products which they say are the same quality but cheaper. Management is considering reducing the selling price. Second, another product - the Moonlight model -, which is an intermediate-level bike, is selling much better than expected at a price of E1,485. Management is thinking about increasing production of this product and considering reducing production of other models, such as the Meteor, to improve profits. Carlos Lopez has sought expert advice to a very good friend, Laura Casanovas, who works as consultant for an international auditing firm. Laura suggested that these decisions must nowof overhead costs and how these might be allocated to products. Laura suggests the analysis of three alternatives: 1) a Plant-Wide Blanket rate based on direct labour hours (to reect how production was organized): 2) Department Cost Centre rates based on machine hours with overhead absorption rates (OAR) calculated using an overhead analysis sheet: and 3) an Activity Based Costing (ABC) system with a range of cost drivers including machine hours. W The company incurs overheads which total 1,200,000. A total of 15,000 direct labour hours are worked. W Laura has categorised overheads under different headings. Figures are expressed in e. Buildin - Rent 50.000 -!I_ 50.000 m 600.000 'E_ E_ For example. machining overhead costs are made up of the salaries of supervisors who maintain the machines and reset the machines between production runs. Procurement costs relate to the sourcing. purchasing and quality control of raw materials. Sales overheads relate to the processing of customer orders and deliveries. General Management costs are the salaries of directors. managers and other workers who work in the product design, and legal and accounting functions. Laura has also gathered relevant information regarding the three different departments: Cost Centre Machining Finishing Administration Floor Area 1,500 sq. m 1,500 sq. m 2,000 sq. m Machine 25,000 hours 5,000 hours Hours Direct Labour 5,000 hours 10,000 hours Hours She suggests the following allocation approach with regards overheads: 'Building Rent' and 'Utilities' overheads are allocated based on floor area. 'Machining' costs are allocated based on machine hours. 'Procurement', 'Sales' and 'General Management ' are treated as directly allocated to the Administration Department. Total Administration department costs are then re-allocated equally between the Machining department and the Finishing department.Laura notes that each unit of the Meteor was machined for 10 hours in Machining and 1 hour in Finishing: and each unit of the Moonlight was machined for 2 hours In Machining and 1 hour in Finishing. W Laura is particularly concerned that batch-level and product-level costs are not appropriately accounted for. She has analysed the Machining, Procurement and Sales overheads. identied an activity and calculated a quantity for each activity. She has gathered information for the three activity cost drivers for the two products. the Meteor and the Moonlight. Quantity Quantity of Driver of Driver used for used for Meteor Moonli ht Orders Orders m-m She suggests that the remaining