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    Lava Rock Bicycles, headquartered in San Miguel, California builds bikes for novice to mid-level cyclists, triathletes, and world-class athletes interested in cross-training. Lava Rock is beginning its 6th year of business. It continues to grow its product line and target customer market and it recently became a public company by issuing shares of stock in the NASDAQ exchange.
    Each bike is made of a frame, a seat, a set of handlebars, gears & shifting system, brake system, aero bars, 2 wheels, and 2 tires. The selling price varies by model and specific components used to build the bike. Variable costs commonly include:
    ? component parts, packaging, etc.
    ? production labor
    ? sales commissions (percentage or per unit basis)
    ? other costs allocated on a per unit basis
    Lava Rock produces 3 models of bikes (mid-level triathlon (Kona model), entry-level triathlon (Hilo model), and mid-level road cycle (Paris model)). The mid-level models have a greater profit margin but lower sales volume than the popular entry-level triathlon bike. Its bikes are sold directly by Lava Rocks and through independent distributors (typically bike shops and mail-order companies).
    Lava Rock Bicycles tries to produce approximately the same number of bicycles it expects to sell in a given period of time. However, it cannot always accurately predict the market. If it manufactures too few cycles, it loses sales. However, because each cycle model improves each year, when Lava Rock Bicycles manufactures too many bikes, it may not be saleable. Lava Rock Bicycles may have to sell its products at a discount or even at a loss to liquidate its inventory. To reduce inventory costs, management is considering implementing a "Just In Time"(JIT) inventory management.
    Goals for the next year are to grow the business to other regions, increase profit margin, and expand its product line.

    Task 2
    Task Type: Group Project Date Due: 3/4/2005
    Points Possible: 200 Project Duration:
    Deliverable Length: 1/2 page per problem - 3 or more pages total
    The individual portion of this assignment is for each person to produce a paper as follows.
    Lava Rocks has fixed cost of $75,000 per month. Each model has the following identifiable sales price and variable material costs respectively.
    Kona $6,500 $2,600
    Hilo $3,900 $1,950
    Paris $4,200 $1,890
    When Lava Rocks sells a bike through a distributor they pay a sales commission of 10% of the sales price. It sells 70% of each bike model through its distributors. Assume that the fixed costs are allocated 40%, 30%, and 30% to the Kona, Hilo, and Paris models, respectively. Currently, the allocations are based on estimated design time for each model.
    1. Calculate the contribution margin for each model. For purposes of this compuation, ignore the sales commission as a variable cost.
    2. Calculate the MONTHLY break-even units for each model.
    This year, Lava Rocks expects to sell 190 units of Kona, 320 units of Hilo, and 240 units of Paris(70% through distributors as expected).
    3. Prepare an income statement (with sales, each type of variable expense (material and sales commission), and fixed expenses) for Lava Rocks using these sales volumes.
    The distributors are requesting a 15% commission on all models. Lava Rocks doesn't want to change the selling prices to absorb this increase.
    4. Compute by how much will it have to reduce other costs to make up for this request? What other counter-proposals could be suggested?
    Lava Rocks is facing fierce competition from a new company, and management decides to lower the selling price of the Hilo by 10%. Also, they decide to take out advertising at a cost of $1,500 per month. This cost will be allocated only to the Hilo product.
    5. Recalculate their Break Even (for the Hilo model only) point given the new information. Ignore the change in commissions.
    6. If 200 units of Kona are sold (70% with the new commission), what minimum selling price for the Kona will put them at break even?
    Also, write 2-3 paragraphs about one of the following. , Draw from what you are learning in this excercise, as well as your own business experience.
    Should sales quota standards be tied to financial reports. Why or why not? If so, how closely? OR
    Contrast and compare the effectiveness of income generation versus expense reduction in creating profitable business.

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