Santa Cruz Bikes (SCB) is a start-up company that manufactures high-quality mountain bikes to compete with products from companies such as Ridgeback and Trek. SCBs high quality bikes have some of their parts acquired from suppliers. Examples are the bike seats, handlebars, tyres and tyre tubes. The company offers a three-year warranty and support to its customers. One of SCBs employees developed a new braking system that allows bikers to descend steep slopes using a consistent braking pattern that pumps both front and back brakes at regular, pre-set intervals depending on the brake setting chosen by the biker. The marketing department surveyed current customers and found they would be willing to pay more for this option. Because SCBs brand is not a well-established one, prices for its bikes need to be kept below those of its major competitors. SCBs owner, Denise Clark, wants the company to launch a line of bikes with the new braking system. Her accountant who has recently joined the company recommended that the company use target costing and/or pricing to develop the new product to ensure that design is a financially viable one. The accountant also highlighted that he was concerned about the companys current reliance on traditional cost allocation system in determining the overhead cost of their product. As such, the accountant recommended that the company could use Activity Based Costing (ABC) as an alternative to the traditional costing system in allocating their overhead costs.

After conducting customer surveys and a number of focus groups, SCBs marketing staff identified five features that are highly important to prospective customers: the weight of the bike, the bikes ability to withstand hard riding in difficult terrain for long periods of time, appearance, ease of handling, and riding comfort over rough terrain. Depending on the brand name of the bike and its components, the market price for competing models with these features ranges between 800 and 1,200. The closest relevant model with the market share in that price range is priced at 949. From the survey and focus group information gathered, Denise believes that a bike with the new braking system and the same levels of quality and functionality as the competitors models should be priced at 950 to achieve a 25% market share. SCB has decided to call the new model the Mountain Braker.

Denise sets a minimum profit margin of 10% on new products. Given this information, Denises accountant sets the new products target cost:

Price 950

Less profit margin 95

Target cost 855

Design Product and Production Process to Achieve Target Cost

Denise has established a team to manage the product and manufacturing process design. The team consists of person from each of the following areas: marketing, engineering, purchasing, accounting and administration. The team identifies an initial cost for the Mountain Braker. The engineer altered SCBs basic bike design to incorporate the new braking system. The cost estimate of 905 is higher than the target cost of 855, so the team considers ways to reduce the cost. The team assembles information about current costs and necessary cost reductions, assuming sales of 50,000 bikes. They identify areas with the most potential for cost reduction and then establish the following estimates for these reductions.

Current Cost Target Cost Reduction Cost Category Per Bike Cost Needed

Similarly, the total manufacturing cost amount of the current costs per bike includes the following: non-variable costs 50; indirect costs 100; delivery costs 20. In terms of the target cost per bike, the total manufacturing costs include the following: non-variable costs 30; indirect costs 120; delivery costs 20.

However, when Denise shared the estimates with his brother, a management accountant, he suggested that a further sub-categorisation of the cost elements and other external information might help the company in its quest for cost reduction and its ambition in securing a 25% market share.

Required:

(i) With reference to SCBs intent of developing a distinct product, discuss two pricing strategies that may be associated with what SCB is seeking to achieve. Your discussion should include the potential challenges that SCB may face in going for either of the two pricing strategies. Where possible, illustrate your discussion with the data from the case

(25 marks)

(ii) As the estimates stand, to what extent do you agree or disagree with the team in terms of their most potential areas for cost reduction? Discuss and where possible, illustrate your discussion with the data from the case.

(25 mar

Santa Cruz Bikes (SCB) is a start-up company that manufactures high-quality mountain bikes to compete with products from companies such as Ridgeback and Trek SCB's high quality bikes have some of their parts acquired from suppliers. Examples are the bike seats, handlebars, tyres and tyre tubes. The company offers a three-year warranty and support to its customers. One of SCB's employees developed a new braking system that allows bikers to descend steep slopes using a consistent braking pattern that pumps both front and back brakes at regular, pre-set intervals depending on the brake setting chosen by the biker. The marketing department surveyed current customers and found they would be willing to pay more for this option. Because SCB's brand is not a well-established one, prices for its bikes need to be kept below those of its major competitors. SCB's owner, Denise Clark, wants the company to launch a line of bikes with the new braking system. Her accountant who has recently joined the company recommended that the company use target costing and or pricing to develop the new product to ensure that design is a financially viable one. The accountant also highlighted that he was concerned about the company's current reliance on traditional cost allocation system in determining the overhead cost of their product. As such, the accountant recommended that the company could use Activity Based Costing (ABC) as an alternative to the traditional costing system in allocating their overhead costs. After conducting customer surveys and a number of focus groups, SCB's marketing staff identified five features that are highly important to prospective customers: the weight of the bike, the bike's ability to withstand hard riding in difficult terrain for long periods of time, appearance, case of handling, and riding comfort over rough terrain. Depending on the brand name of the bike and its components, the market price for competing models with these features ranges between 800 and 1,200. The closest relevant model with the market share in that price range is priced at 949. From the survey and focus group information gathered Denise believes that a bike with the new braking system and the same levels of quality and functionality as the competitor's models should be priced at 950 to achieve a 25% market share, SCB has decided to call the new model the Mountain Braker Denise sets a minimum profit margin of 10% on new products. Given this information, Denise's accountant sets the new product's target cost: Price 950 Less profit margin _95 Target cost 855 Design Product and Production Process to Achieve Target Cost Denise has established a team to manage the product and manufacturing process design. The Icam consists of person from each of the following areas: marketing, engineering. purchasing. accounting and administration. The team identifies an initial cost for the Mountain Brake The engineer altered SCB's basic bike design to incorporate the new braking system. The cost estimate of 905 is higher than the target cost of 855, so the team considers ways to reduce the cost. The team assembles information about current costs and necessary cost reductions, assuming sales of 50,000 bikes. They identify areas with the most potential for cost reduction and then establish the following estimates for these reductions Current Cost Target Cost Reduction Needed Cost Category New brake development FSO Price 950 Less profit margin _95 Target cost 855 Design Product and Production Process to Achieve Target Cost Denise has established a team to manage the product and manufacturing process design. The team consists of person from each of the following areas: marketing, engineering, purchasing, accounting and administration. The team identifies an initial cost for the Mountain Braker. The engineer altered SCB's basic bike design to incorporate the new braking system. The cost estimate of 905 is higher than the target cost of 855, so the team considers ways to reduce the cost. The team assembles information about current costs and necessary cost reductions, assuming sales of 50,000 bikes. They identify areas with the most potential for cost reduction and then establish the following estimates for these reductions. Cost Reduction Needed Current Cost Per Bike 50 710 760 Target Cost 50 680 730 Cost Category New brake development Manufacturing Total manufacturing costs Selling and distribution Warranty and support Administration Total cost 50 35 30 45 55 905 855 Similarly, the total manufacturing cost amount of the current costs per bike includes the following: non-variable costs 50; indirect costs 100; delivery costs 20. In terms of the target cost per bike, the total manufacturing costs include the following: non-variable costs 30; indirect costs 120; delivery costs 20. However, when Denise shared the estimates with his brother, a management accountant, he suggested that a further sub-categorisation of the cost elements and other external information might help the company in its quest for cost reduction and its ambition in securing a 25% market share. Required: (1) With reference to SCB's intent of developing a distinct product, discuss two pricing strategies that may be associated with what SCB is seeking to achieve. Your discussion should include the potential challenges that SCB may face in going for either of the two pricing strategies. Where possible, illustrate your discussion with the data from the case (25 marks) (ii) As the estimates stand, to what extent do you agree or disagree with the team in terms of their most potential areas for cost reduction? Discuss and where possible, illustrate your discussion with the data from the case