Problem:
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.
Operations deals with how the company is performing. Operations may be refined into different manufacturing processes such as design, materials procurement, assembly, testing and so on.
A VP of operations has asked you to make a presentation at the weekly status meeting on how to improve the efficiency and effectiveness of each manufacturing subprocesses individually and as a whole.
She states that to drive performance, you will need to examine accounting-based data on material, labor, and overhead costs. These types of information are not disclosed in financial reports for lenders and owners. Rather cost information relates to how to operate now and moving forward. External reports are more backward-looking about how an entity DID operate. While there will be a strong relation between operation profits and profit per the external financial statements, the way that profitability is measured can vary greatly especially since profits on an external financial report are defined according to strict definitions. Nevertheless, the VP of operations finds the relation between operation profits and profit per the external financial statements most useful. You are to present your findings and recommendation at this meeting.