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1. Activity based costing provides a more accurate overhead cost position.

2. Activity Based Costing gives valuable information to management on operations that add value and those that do not. ABC is instrumental in capital investments, pricing, organizational change and product mix.

3. Activity Based Costing can more easily identify production activities and resources.

4. Activity Based Costing has been proven for being effective in controlling costs, improving profits and productivity. This is an example of not reinventing the wheel. ABC works.

Concerning directly to Competition Bikes, inc. – utilizing Traditional Cost accounting the Titanium units cost was $239,020 but utilizing Activity Based Costing, the cost of was $232 380.

The traditional costing method analysis shows the titanium frame cost $713. The ABC method analyses shows the titanium unit at $656.

To summarize and support the implementation of the ABC method to replace the traditional method for Competition Bikes, inc. is primarily because the traditional method uses a percentage of the total and ABC method uses details of only the precise activities needed for individual products.

Our product line is comprised of primarily the titanium line – 900 or 65 percent of our product sales and our carbonlite line is 500 of our product sales or 35 percent. The titanium line is 50.7 percent of our manufacturing overhead and the carbonlite is 49.3 percent. Under the traditional method the titanium is 48.5 of our total cost and the carbolite is 51.4 percent of our total cost. Under the ABC method, the titanium is 44.7 percent and the carbonlite is 55.3 percent.The ABC method is more precise. We see that the Carbonlite is only 35 percent of our sales but is 55 percent of our total expenses

This change in methodology brings exact activities into consideration. In quality control for the titanium line we spend only $2, 104 but for the carbonite quality control we spend $116,896. In engineering services, the titanium line we spend $12,500 and in the carbonlite line we spend $62,500.

It is common knowledge that if a company’s fixed and variable expenses increase then the end product must increase in price. If the company is forced to increase their fixed costs by $50,000 and if vendors increase material costs by 10 percent. Competition Bikes, inc. must increase their per unit sales price to achieve the same breakeven point. This may be avoided if the company negotiates a decrease in supplies for the purchase of a higher quantity, They must be careful to not end up with excess inventory at year end.

Cost-volume-profit ( CVP ) is utilized to analyze how an increase in raw materials and reduced production can negatively affect a company. A CVP analysis must include sales, administrative costs and manufacturing costs. These expenses should be labeled variable or fixed.

· Sales price per unit is constant per schedule- fixed.

· Variable costs per unit are fixed and constant.

· Total fixed costs are fixed an constant.

· Assuming everything produced is sold.

· The affects of costs are only because of activity changes.

· All products produced by a company are sold in the same mix

Example of utilizing the CVP. When the fixed costs are increased by $50,000 and with an

increase of 10 percent in raw materials, the results for Competition Bikes inc., the contribution profit margin for the Titanium line went from $ 221 to $ 191. The Carbon Lite went from $111 to $44.

The weighted breakeven was $690 but increased to $871 for Competition Bikes, inc. due to the $50,000 over head cost and the 10 percent materials increase. With the decrease in contribution profit sales price, obviously they must increase sales price and / or increase sales volume. If we increase our over head an additional $50,000 and we have an additional increase of 10 percent of raw materials our new breakeven point on sales will be 3254 more units. Nearly a 50 percent increase.

The cost profit tab shows with the increases in the $ 50,000 overhead and 10 percent product increase, the Titanium sales price goes to $1415 from $900, the variable cost goes to $709.30 and the contribution margin drops to $191 from $221. The carbonlite price at $1,495, the variable costs goes to $ 1,451 with only a contribution margin profit of $44 from $111. The sales weight average contribution margin per unit is $138 from $181.71. We need to sell 2092 titanium models and 1162 carbonlite models.

With the $50, 000 increase and only a weighted average of $138 from $181 – this

requires an additional sale of 362 units.

In summary, with both of these increases, we will have to increase our sales from 2201 to 3254.

Running Head: DILEMMAS OF MANAGERIAL DECISION MAKING 1

DILEMMAS OF MANAGERIAL DECISISON MAKING 3

Dilemmas of managerial decision making

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The managerial system is an essential aspect in any company or organization. The decision making system enables the executive members of a given institution to make informed and professional’s judgment (O’Fallon et al, 2005). The aspect of effective, fair and reasonable managerial judgment positively impacts the company’s or institution progress. Managers are on that note expected to be professional when making certain decision of their companies. However, the managers can also face some dilemmas in the decisions they make (Ferrell et al, 2012). These dilemmas may include

Every manager looks for qualified and experienced personnel to hire for a certain post. They assume that the individual will positively impact the company due to his previous experience. This can however, be an immense disappointment since not all people who have work experience are outstanding performers. The manager can instead concentrate on nurturing his indigenous employees in preparedness for higher posts (Black, 2011).

Secondly, most managers believe that graduates from internationally recognized universities are effective and efficient. Graduates from institutions like Harvard and oxford are mostly given a first priority. Managers should understand that learning from a famous university does not guarantee the individual’s performance and quality (Ferrell et al, 2012). The managers should consider the potential and capability of an individual.

Thirdly, Professional and effective decision making is another crucial aspect in any executive body. The decisions made by the manager should favor all employees and take all their factors in to consideration (Black, 2011). The manager should therefore, consult others departmental officials to ensure that the decision made will be fair to all employees. Fourthly, the manager should be an admirable example to all other officials and employees by adhering to the policies and regulations of the company. Each company has its own rules and regulations that apply to all members including the manager (Ferrell, et al, 2012). Majority of managers consider themselves to be above the rules thus leading to lack of motivation to other employees.

Another issue that faces most managers is lack of acceptability. Every individual is unique, and managers should also try to understand all their employees. Some individuals may have various diseases or disabilities which require regular treatment. The manager should be flexible enough to allow the individual the time to attend to all this. Another issue is on talent development (O’Fallon et al, 2005). Managers rarely motivate their employees to use their given talents for the advancement of the company. The academic level of the employee is the paramount concern of many managers. Managers should invest in the different abilities and talents of employees to make new and creative achievement (Ferrell et al, 2012).

Managers mostly prefer individuals who are skilled in different areas. This is a brilliant idea as it reduces on the company’s spending. On the contrary, this decision can also be fatal to an organization (O’Fallon et al, 2005). An individual can have skills in three or more areas but can be deficient in all the skills. So it is very essentials for managers to ensure that the employee is efficient in all the skills that he claims to have.

Managers also have a dilemma when weighing the financial and developmental options. A manager should not be too quick to make a move before weighing on other options (Ferrell et al, 2012). Before settling for one particular option, the manager should weigh all other options. Finally, the issue of implementation of proposals and agenda is also essential. Most managers are choosy and may implement proposals which only favor their personal interest. This is not advisable as it can lead to the collapse of a company (Black, 2011).

References

O’Fallon, M. J., & Butterfield, K. D. (2005). A review of the empirical ethical decision-making literature: 1996–2003. Journal of Business Ethics, 59(4), 375-413.

Black, K. (2011). Business statistics: for contemporary decision making. John Wiley & Sons.