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Year 9 Budget Concerns for Competition Bikes, Inc
The year 9 budget of Competition Bikes Inc comprises of all the necessary schedules. In other words, it conveys straight and sound information except for a few concerns in regard to its content and presentation.
First concern relates to the quarterly activities. The activities in the budget are not separated into quarters. This is mainly because bicycling is an outdoor sport, which depends on weather. Therefore, the bicycling competitions are seasonally held and it involves professional bicycle teams. This lack of quarterly segregation of activities makes it hard to view and respond to the low as well as peak seasons. For instance, the purchase of materials does not put into consideration the seasonal activities, hence if the peak falls in summer, then will be a need for the company to build an inventory in spring and lower then as the season falls. Such quarterly divisions enable the company to make use of its inventory rightfully in covering unexpected hike in sales and not in covering budgetary issues.
The second concern regards the projection of sales. The projection in the sales budget provides an exact forecast into the future sales. This is because it takes into account the factors, such as market trends and other econometric data. For instance, the past performance of sales does contradicts the projected value of 3510 units for year 9. This is because of the noted 15% decrease in sales in year 8 in comparison to year 7 levels. This is also based on the reduced sponsorship, which was projected to persist for the next three year. In other words, sponsorship is likely to remain low up to year 11.
Evaluate the Flexible Budget and its Variances.
The difference between a static and a flexible budget depends on the output level. A static budget focuses on the initial budgeted output level, while a flexible budget is created from the cost amounts or the budgeted revenues based on the real output level during the period of budgeting. It is not possible to know the actual output level until the budget period is over.
A flexible budget enables the managers to draw a distinction between the budgeted amount and the actual result. This distinction is based on factors, such as difference in the output level, selling prices, fixed costs and variable costs. There are three main steps involved in developing a flexible budget. These include recognizing the real amount of output, creating a flexible budget from revenues based on the real amount of output and the selling prices, and developing a flexible budget costs depending on the planned fixed costs, the actual output levels, and the budgeted variable costs. The standard costs helps in management, budgetary decisions, and pricing strategies.
The Concept of Management by Exception and the Variances
Managing by exception involves giving less attention to areas that are operating as expected, while putting more emphasis on areas that do not operate as expected. Managers can only identify inadequate areas through variance analysis. A larger variance is an indication that an area is not operating as projected. Managers can obtain information on budgetary amounts from a detailed engineering studies as well as the past amount.
A variance is considered favorable, if it results in increased operating income in relation to the planned amount and is denoted by F. An unfavorable variance causes a reduction in the operating income with regard to the budgeted funds.
A Capital Structure Approach That Maximizes Shareholder Return
With the opportunity to expand into Canadian markets, the company needs to evaluate its financial position and decide on the best method for funding such expansio. Given the various alternatives for Canadian expansion, I focus on the following highlighted options coupled with the current market conditions. It is worth noting that we encompass a timeline of 5 years from year 9 through to 13. The aim is to allocate $600,000 for this expansion
a). a 100% Bond financing with an interest rate of 9%\
b). Taking a bank Loan at 6% with recompensing balance of $150,000 (at minimum) at a return of one percent.
c). 40% Bonds @ 9% with 60% Common Stock
d). Issuing combination of 50% Preferred Stock ($5, $50 par) and 50% Common stock
e). Twenty percent Bonds at 9% with 80 percent common stock
f) Sixty percent bonds at 9% with forty percent Common stock.
Each of these options has benefits and limitations. First, bank loan requires a minimum balance of $150,000 with only 1% return. It would be more lucrative to invest such amount in other areas. Option d) and e) seems to have the greatest impact on earnings per share. With regard to capital structure breakdown, option d) seems the best option, because of the combination of common stock and preferred stock, which provides the finest earnings per share.
2. Discuss Capital Budget Areas That Raise Concern
First concern relates to the quarterly activities. The activities in the budget are not separated into quarters. This is mainly because bicycling is an outdoor sport, which depends on weather. Therefore, the bicycling competitions are seasonally held and they involve professional bicycle teams. This lack of quarterly segregation of activities makes it hard to view and respond to the low as well as peak seasons. For instance, the purchase of materials does not put into consideration the seasonal activities, hence if the peak falls in summer then there will be a need for the company to build an inventory in spring and lower then as the season falls. Such quarterly divisions enable the company to make use of its inventory rightfully in covering unexpected hike in sales and not in covering budgetary issues.
Projection of Sales
The second concerns regard the projection of sales. The projections in the sales budget provide an exact forecast into the future sales. This is because it takes into account the factors, such as market trends and other econometric data. For instance, the past performance of sales contradicts the projected value of 3510 units for year 9. This is because of the noted 15% decrease in sales in year 8 in comparison to year 7 levels. This is also based on the reduced sponsorship, which projected to persist for the next three year. In other words, sponsorship is likely to remain low up to year 11.
3. Discuss how working capital can be properly obtained and managed for the Canadian expansion.
Market research reveals that Canada is a potential market for Competitor Bikes with an output demand of 10%. Therefore, Competition Bikes Inc has a work plan on how the working capital would be acquired as well as upheld. First, every distributor will be serviced with a monthly invoice containing all the raw materials that have been ordered with terms of net for every thirty days or one month. The inventory is paid one month after the production date. The Competition Bikes Inc receives invoices from suppliers at the end of the month with a term of every 15 days. The company then organizes to pay the invoice fortnightly after receieving them from the suppliers. Competition Bikes Inc a marginal tax rate of 25%. Depreciation expenses are effectively documented in the manufacturing overhead.
4. Discuss whether Competition Bikes Incc. should merge with or acquire the Canadian Biking Inc. facility.
Competition Bikes Inc. should consider acquiring the Canadian Biking facility. This is because merging would reduce the level of productivity based on the fact that ratio of shares favors Canadian bikes to the disadvantage of Competition Bikes Inc. It is also worth noting, that acquisition will enable Competition Bikes Inc to expand its geographical coverage, which ensures that it penetrates into the adjacent markets in Canada. Acquisition also assures the company of increased profitability and productivity. In other words, there will be an expansion of output with stable costs hence high profits. This is not case with merging since merging increases managerial needs, which increase the cost of production. The end result is that productivity will be sliced off. Acquiring the Canadian Biking Inc will help the Competition Bikes Inc to grow its market share without having to work, but rather buying the company at a price.
D. Summary Report
1. Change The Costing Method To Activity-Based Costing
Competition Bikes Inc needs to change their costing method from traditional approach to activity-based costing. This is because the activity-based costing method allows a logical sequence in assigning the overhead costs to departments.
Let us check the activity-based costing in relation to two products, manufactured by Compatition Bikes Inc. these are CarbonLite and Titanium. The Carbonlite bikes is a low volume product item that needs activities, such as special engineering, extra testing and various machinery to be put in place. It also accounts for few orders of all the orders that are received by the company. Titanium bikes, on the other hand, has high volume production
2. An Evaluation of Cost-Volume-Profit
a. The breakeven point for Competition Bikes Inc. with regard to sales units and sales dollars for both CarbonLite and Titanium bikes.
The administrative expense showed a slight correlation with the operating income. Among others costs, the managers often have full charge on the managerial expenses. The nets sales for year 8 showed a clear reduction, the managers acted by reducing the administrative expenses. Administrative expenses encompass office supplies, market information, annual meetings, professional services, telephone communication, travels and meetings. It is evident, that the position of the company was greatly improved in year 6, 7, and 8 as compared to the earlier years. High profitability was realized as the liguidity remained constant.
In the past three years, the sales and profitability of Competition Bikes Inc have been in a significant shift. Between year 6 and year 7, the net sale for the Company increased by 33%, but this was drastically reduced by 15% between year 7 and year 8. Year 7 recorded the highest increase in sales of 300%.
The decline in sales can be attributed to the reduced sales activities, such as sports as well as the decreasing in the selling price of bicycles in year 8. Year 8 also recorded a decline in profitability due to declined orders from the sponsorship teams. The Competition Bikes still needs increase its sales to reach the breakeven point
An increase of $50,000 in the fixed costs is likely to reduce production, which in turn is likely to drastically affect profitability. The net sales are also likely to reduce. The implication of this on the breakeven point is that the company will need to increase its operating income as well. When the cost of materials increases and fixed costs also hikes, then the cost of goods sold will increase in the income statement, which in turn reduces the net sales. This means that the breakeven will be destabilized.