Case Scenario:
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.
You have been studying the 'fixed' costs. You learn that a number of 'fixed' costs are actually mixed costs (variable and fixed). Write a 2 paragraph memo to your manager to explain how you can determine the fixed and mixed portion of each cost (such as utility costs, maintenance costs) and why it is relevant to more accurately understand the types of costs.
Lava Rocks would like to implement a JIT inventory system. You are to make a presentation at this afternoon's meeting on the pros and cons of JIT, as well as, how it can be applied at Lava Bikes. Use the cybrary to research articles on JIT inventory systems at another company for supporting material.
You decide to refresh your memory on JIT by reading the article from Information Week (May 7 ,2001) on Just-in-Time Inventory
(https://www.informationweek.com/836/collaborate5_side.htm)