1) 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 prod ...