Kert Cycles Scenario 1

Celine Kert has had a passion for cycling for years. She has decided to explore turning her passion into a scaleable business. She has spent the last few months exploring the industry and collecting information to facilitate decisions about the focus of the business. For the moment, Celine thinks she has raised sufficient starting capital through family and a somewhat generous friend.

Celine's first option is to focus on an area of the market she believes is a bit underdone: bikes for mid-teens, a market she labels as youth. She has made a set of estimates as shown in Exhibit 1.

Kert Cycles - Exhibit 1 Estimates for Year 1: Single product: Youth Bikes
Item		Additional information
Bike sales volume	1200 bikes
Average selling price	$650 per bike
Average variable cost of bike (purchase of basic bike, additional assembly related costs)	$380 per bike
Sales and marketing	$46500	40% variable; 60% fixed
General and administration expenses	$65000	fixed
Occupancy and rental expenses	$108000	fixed
Direct fixed workshop and bike costs	$65000	fixed

Required:

Note: Responses completed on in writing and spreadsheet.

1. Calculate the contribution margin per bike
2. Calculate the number of bikes required to break-even.
3. Based on the evidence, is Kert Cycles currently profitable? Briefly explain. Are you able to provide an estimate of current profits

Kert Cycles Scenario 2

The other option that Celine has been exploring is to offer a wider product range including two other specialist bikes: adult mountain bikes and adult road bikes. From her investigations, Celine realises this is a highly competitive part of the market, but she thinks she needs to offer a wider range of bikes to attract the higher-end buyers. Her year 1 estimates are in Exhibit 2.

Kert Cycles - Exhibit 2 Estimates for Year 1: Multiple-products
	Youth	Road	Mountain
Bike sales volume	750	800	450	2000
Average selling price	$600	$1200	$950
Average variable cost of bike (purchase of basic bike, additional assembly related costs)	$380	$620	$590
Direct fixed workshop and bike costs	$45000	$68000	$82000	$195000
Other cost items		Additional information
Sales and marketing	$86,000	fixed
General and administration expenses	$95000	fixed
Occupancy and rental expenses	$188000	fixed

Required:

1. Calculate the weighted average contribution margin (WACM) per bike.
2. Determine the break-even level of bikes overall and per bike-type.
3. Celine was hoping to earn a pre-tax profit of at least $200000 in the next few years. Does this seem feasible?
4. Celine is a little worried about her estimates around price-volume- and costs. By way of illustration, she is thinking about raising the price on the Youth Bikes by 15% with an impact of reducing sales volume by 10%. At the same time, she would like to try decreasing the price of Road bikes by 15% with an increase in sales units of 20%.

What's the likely impact on planned profits? What do you advise?