Veloplus
Essay title: Veloplus
Should the company abandon the production of touring bicycles in order to concentrate on the competition bicycle?
In order to determine whether the company should or should not continue manufacturing it is important to calculate the Contribution Margin of every product. According to the reference Breakeven Analysis “Contribution Margin correspond to the amount generated by the object during a given period to support the company’s fixed costs and generate profit”. It seems important to calculate contribution margin of every product in order to determine first their profitability and second their ability to cover their fixed costs.
It is important to mention that the preliminary management’s conclusion regarding abandoning the production of touring model and focus on the production of competition model is based on a weak product profitability analysis. This analysis shows certain concepts and cost allocation criteria that are not correct.
In order to determine the contribution margin of each product, it is necessary to separate the fixed cost portions that are included in the Manufacturing Overhead ($168,000) and in Selling and Administration Expenses ($ 162,000), the remaining amount represents variable costs. The contribution margin is defined as the difference between Revenues and Variable Costs, for Veloplus the contribution margin of its products will be:
At this stage, the only conclusion that can be made is that the competition model has the higher contribution margin of the three products and touring model has the lowest contribution margin. But this is not enough to make a decision regarding which product should be abandoned. In order to have a better picture it is required to determine how every product contributes to support Fixed Costs. The following table shows the profit by product and the total profit of Veloplus.
In Veloplus case, there are certain fixed costs that are clearly separated for each product; there are other expenses that are general or indistinguishable. Looking at this table it is clear that the competition model requires more resources than the touring and mountain models, and as a whole these two models are covering the competition model expenses. These numbers show that the first decision that has to be made is to keep producing touring model. The next question is, Should they continue producing competition model?, if the answer is yes, how many and at what price?.
What do you think of the selling price of $795 for the competition bicycles?
In the table shows above it can be seen currently the competition model is not profitable. In order to determine whether the price is the best or not we will do the breakeven analysis.
After distributing the fixed cost and expenses using the proportion of every category, the calculation of the breakeven point suggests that Veloplus should be selling at least 486 unit of the competition model at the price $ 795 in order to not lose money by selling them.
Since the market study done for Veloplus