ACCT7107: Fantasy Bike Ltd. Case Study - Management Assignment Help

Assignment Task:

Task:

Ten years ago, our bike business was in real trouble. Low labour rates allowed in the Asian countries to sell standard road bikes at prices we were unable to match. We had become the high cost producer in the industry. Consequently, we decided to change our strategy and become a specialty mountain bike producer. Once we adopted our new strategy, we discovered that while our existing cost system was adequate for costing standard road bikes, it gave us inaccurate information when we used it to cost specialty mountain bikes. - Mr. John Bradshaw, direct of Business Operations, Fantasy Bike Ltd

Fantasy Bike Ltd.

Located in Germany, Fantasy Bike Ltd is a producer of bikes. Through the 1990s, Fantasy produced about 200 different types of standard road bikes, at a total annual volume around 230,000 bikes. Standard road bikes accounted for 80% of sales volumes – the remaining 20% was customized mountain bikes. The production process was characterized by relatively long runs of a single type of bike. Because identical bikes were used by a wide range of customers, standard road bikes were inventories and shipped as orders were received. The market for standard road bikes was extremely competitive. The firm was under constant pressure to reduce costs so that it could price aggressively and still make a profit. Despite a major expansion and automation program begun in 1994, by the early 2000s Fantasy Bike found it could not lower its costs sufficiently to offset the lower labour rate of its Asian competitors.

Change in Strategy

An extensive report revealed that Fantasy Bike could become a profitable producer of low volume, customized mountain bikes. To help implement this strategy, the manufacturing plant was enlarged and dedicated to the manufacture of various mountain bikes, e.g., Electric, Dual Suspension and Trail Hardtail. For the new strategy to succeed, Fantasy Bike needed to be able to manufacture efficiently a large variety of mountain bikes in small production runs. Between 2005 and 2008, Fantasy Bike replaced almost every machine on the shop floor and thereby create a production environment that could support it new strategy.

By 2007 the production process was highly automated with numerically controlled machines, flexible machining centres and robotically fed production processes used throughout the factory. Large low volume components might be made in manual production processes. While a normal annual production volume for common components might be 100,000 units, a single component could have up to 10,000 custom variables that might have to be produced one at a time.

To design a custom mountain bike, modifications were made to a standard road bike design. The process involved determining where standard components could not be used. These standard components were replaced by custom components that provided the functionality required by the customer.

Change in the Calculation of Product Costs Fantasy

Bike’s product cost system assigned materials and labour costs directly to the products. Overhead costs were divided into three categories: materials related, production related, and support related. Materials related overhead, containing costs associated with material acquisition, was allocated to products based on their direct material costs. Production related overhead was directly traced to the 600 production cost centres. A production cost centre had been created for each type of machine. Cost centres with high labour intensity used direct labour hours, machine hours was used as the allocation base.

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