Mile High Case Study

[pic 1]

MILE HIGH CYCLES

Case Study

[pic 2][pic 3]

Mile High Cycles

Bob Moyer of Mile High Cycles seems to be concerned about the management of its costs for producing 10800 mountain bikes which is an excess demand of 800 bikes from their standard. If we look at the costs incurred (per item line) for producing 800 more bikes, there is a decline in gross margin from 16.19% (Budgeted) to 7.51% (Actual) given their sales were $13 million in 2004. This raises concerns for efficient cost management (Exhibit 1).

Concluding from the Material Price Variance calculations (Exhibit 2), it seems that Frame assembly line is a favorable process with a positive variance (-$28,663) but there is a negative variance in Wheel Assembly (-$50,650) and especially in Final Assembly Production (-$231,200) due to increased kit prices and addition of miscellaneous parts. Looking at the Material Usage Variance table, the Volume Variance for the Frame Assembly is favorable but not very favorable for Wheel and Final Assembly Process. This is true especially for Final Assembly (-$43,600) due to addition of Rework parts in the process. As for the Cost Variance none of the processes is favorable especially Frame and Final Assembly. The reason for such a negative price variance for Frame assembly (-$195,837.5) may be due to increased prices for each of the materials and also the labor hours. In Frame assembly production (-$187600) the addition of rework parts and increased prices of kits are to be blamed again for negative variance. Total Overhead Volume Variance ($56,000) is Favorable (Exhibit 3).

Given the Budget and Variance analysis it is quite obvious that Bob Moyer should be concerned about Mile High Cycles’s performance. It is highly advised for Bob to look in the final assembly production line to find ways to reduce material prices. He should also be concerned about such a huge variation in actual material prices than the budgeted prices and try and find out what data lacked to be taken into consideration for this variation to occur. Also what caused data about the rework part to be neglected in the Budget.