The Company

Qbikes Corporation (Qbikes) is a renowned premier designer and manufacturer of Folding and Electric Bicycles. It aspires to be one of the leading players in the markets. There are many players in the industry including those from China. Therefore, the margins tend to be thin.

Qbikes has two divisions, one division assembles and sells three models of folding bikes, and another division assembles and sells one model of electric bikes.

The followings are the budget for next financial year (1 January 2023 – 31 December 2023), indicating the average selling price and variable costs of each product category. The common fixed manufacturing overhead and the fixed non-manufacturing overhead costs are estimated to be $1,250,000 and $2,778,320 respectively.

Q1. Based on the above budgeted information, calculate the expected breakeven units for the Model 2 folding bikes.

Q2. The company is assessing whether it should invest a one-off lump sum of $1,000,000 on an advertising campaign to help push its net profit to increase by $1,300,000, making its net profit margin to exceed 20%. Nevertheless, the marketing manager understands that it would be very difficult for the company to further increase its revenue by more than 35% due to limited customer base and resource availability.

Assume that there will be no change of the average unit selling price and variable costs for each product, how much would be the expected revenue to generate the new expected

profit with such an advertising campaign? Should the company go for the advertising campaign?

Suggest with reasons whether the company should still do some advertising

Q3. Briefly explain any possible unethical practice to be done by the company in order to report the revised new profit target. How can the potential problem(s) be resolved or controlled?

Qbikes’ two divisions also share some supporting departments’ services including Information Systems (IS), Finance, Accounting & Human Resources (FAH), and General Administration (GA).

The company is deciding whether to use the direct and step-down methods. The allocation bases have been confirmed. Number of user ID, number of employees and floor area occupied are for allocating IS expenses, FAH expenses and GA expenses, respectively. Table 2 presents the estimated information for one month.

Q4. Compute the total allocated costs for the two-production divisions by using the direct method.

Q5. Compute the total allocated costs for the two-production divisions by using the step-down method (Allocate in order of IS, FAH and GA).

Q6. Based on your calculated figures in Q4 and Q5, which method would you recommend the company to use? Briefly explain your reasons.

The company is also exploring the use of activity-based costing technique to allocate the nonmanufacturing overhead. The accounts department has gathered the following estimated monthly information:

Q7. Use the activity-based costing method to determine the appropriate values of nonmanufacturing overhead being allocated to the two divisions. If necessary, use reasonable assumptions to determine the appropriate driver for each cost.

Q8. For non-manufacturing cost allocations, there are different methods such as the direct, stepdown and ABC methods mentioned above, explain the rational of the each of the three methods. Which method(s) would you suggest the company to use? Explain your recommendation.

Q9. Design a balanced scorecard for the company. Explain and highlight your key considerations when designing the scorecard and the key performance indicators (with examples of measures in each perspective) for the division. If necessary, you may use any reasonably assumed figures.