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Mile High Cycles Case Analysis Draft
Mile High Cycles Case Analysis Draft
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Question 1:
Bob Myer’s prepared a budget for Mile High Cycles at the beginning 2004, within his
budget he planned to produce 10,000 cycles with a total of $10,895,000 in production costs. In
2004 the cycle market demand was high causing Mile High Cycles to produce 10,800 cycles, 8%
more than budgeted. The 10,800 causing a total production cost of $11,969,787, which was
9.86% higher than expected. Please see Exhibit 1 for Mile High Cycle’s 2004 flexible budget
variances. Based on the Mile High Cycle’s budget presented in the case there is a theme of
Exhibit 2 provides details of Mile High Cycle’s 2004 flexible budget, it compares apples
to apples by showing variances in total production costs of 10,800 cycles at similar per unit
planned budgeted cost of 10,000 cycles. Exhibit 2 shows that if Mile High Cycle could maintain
their estimated production expenses, they would have produced the 10,800 cycles at an
individual cost of $1,084, $6 lower than their planned budget of $1,090. This $6 extra could have
meant an additional $56,000 to their bottom line. Within the planned budget it appears that Bob
did not account for additional costs in wheel and final assembly rework parts, this alone added
$70,000 to total expenses, accounting for about 27% of the total variance in cost.
Question 2 & 3:
Please see Exhibit 3 for Mile High Cycle’s 2004 direct material, direct labor, and
overhead variances. The cause of the variances seen in Exhibit 3 are from the usages and
price/rates of materials and labor. In 2004 more cycles were produced than Bob budgeted for
therefore more labor and materials were needed, the actual costs of the materials and labor were
also higher than budgeted, which caused unfavorable variances in budgeted labor and materials.
As seen in Exhibit 3, the direct labor for frame assembly is the first stage of cycle production and
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it is much more efficient than the other two stages of assembly, hence the favorable frame labor
cost. In regards to the frame’s direct material costs as seen in Exhibit 3, the variances in steel
tubing is unfavorable because higher usage and prices of direct material. Although less usage
frame paint is unfavorable due to higher costs. With this, Bob should consider reviewing tubing
and paint costs and material waste to lower the variance of the two frame costs.
The wheel assembly has unfavorable variances across the board with direct materials and
labor leading to a higher unplanned spend of $50,650. This higher spend can also be blamed on
higher material usage and cost of parts as well as more labor and higher labor rates. With this
Bob needs to be sure the wheel machinery is producing efficiently and workers are trained well
to lessen labor hours and extra material waste. The final assembly costs also resulted in an
unfavorable spend of $231,200, similar actions can be taken with this as the other two
departments, as well as use of historical actual budget data. The trends in the historical data can
shed more light on material and labor costs to plan more accurately.
The major driver in overall unfavorable variances is due to the wheel assembly and final
assembly “Rework Parts” costs. The wheel assembly rework parts cost of $25,000 leads to an
unplanned price increase of $2.00 for parts and $.50 for labor and the rework parts cost in of
$45,000 with final assembly leads to a direct material cost increase of $17 and $.50 for direct
labor. These extra rework costs can possibly be eliminated if Bob ensures equipment/machinery
functionality and worker assembly accuracy, therefor they won’t need to be “reworked”.
In terms of overhead cost variances (fixed, variable, and other costs) seen in Exhibit 3
there is a total unfavorable cost of $60,000. In the end Mile High Cycles has a favorable volume
variance, but they have an unfavorable total cost variance of $203,187. This means that extra
unplanned production becomes more costly. Bob needs to pay close attention to this because an
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increase volume should result in lower costs. It is possible that Bob’s underestimation of fixed
and overhead costs played a large role with the unfavorable total cost variance. He needs to put
priority in reviewing overhead cost estimations for more accuracy in future budgeting.
Overall, these variances in the flexible budget gave more insight to what is exactly
happening within the budgeted costs and allocations. Even though the company showed an
increase in cost variances from the budget to actual production they managed to increase their
net income by $490,400 with the 800 extra cycles. When looking further into Mile High Cycle’s
production cycle and variances, Bob should be concerned with higher than planned material
costs and waste. He can resolve these higher costs by assessing his machinery, workers abilities,
supply chain, and outside vendors, especially within the final assembly since it has the highest
unfavorable cost variances. Bob can always seek more insight from his employees and managers
to the cause of increased labor hours and material waster, they are his greatest asset along with
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Exhibit 1: Mile High Cycle 2004 Flexible Budget
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Exhibit 2: Mile High Cycle 2004 Flexible Budget Details
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References:
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“Mile High Cycles.” Bruns, William J., Jr.; Ellison, David J. Case No. 9-191-056. Published
11/08/1990, Revised 05/17/2004. Harvard Business School Publishing.
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