you, CPA, have just met with Cam Shackelton. Cam owns a bike manufacturing company, Kootenay Bikes Inc. (KBI) based out of Kelowna, BC, and is looking for advice on the company's strategy going forward. KBI was founded a number of years ago when, following his passion, Cam taught himself to make bicycle frames from scratch. Cam started out making bikes for friends and family, and was surprised to discover that they loved the product he was creating. He decided to take a risk and started his own bicycle business out of a small industrial shop in his hometown with his friend, Bill Cullen. As KBI grew, Cam tried to ensure that the business stays true to its vision, mission, and values, outlined in Appendix I. The company's bicycles are called Kroozers and KBI now makes three models of Kroozers ? Entre, Dlux, and Ultra. All of the models were designed to exploit the unique metal machining techniques originally developed by Cam. In addition to complete bicycles, the company also sells Ultra frame sets ? units that comprise only a frame and fork, with no added components. Unique features of the Kroozer include light-frame tubing and the ability to use tires as wide as 7.5 centimetres on 74-centimetre rims. The large diameter and extremely wide tires roll over obstacles more easily and provide greater stability in sand and snow. Customer feedback has been extremely positive. On the company's blog, Kroozer owners frequently comment that the bikes offer amazing value relative to their prices, which have not increased since the bikes were introduced five years ago. However, some Kroozer fans have speculated that it is just a matter of time before an offshore bicycle maker notices the appeal of Kroozers and introduces an even cheaper substitute. Cam has not patented his designs due to the upfront expense, and he feels that it is too easy to circumvent a patent and therefore not worth the money. Despite operating at capacity, KBI is experiencing losses and cash flow problems (see Appendix II). Cam told you that he has just talked to his banker about securing additional funding for KBI to support the expected growth, and that the bank will not increase KBI's operating line of credit at this time. However, because of the steady stream of orders and customer accolades, Cam believes that the market will continue to expand and that, ultimately, he will be very successful.

From a strategic standpoint, Cam sees three potential options for his business: 1. Organic growth: Increase current capacity and grow organically, maintaining the core of the business as is (Appendix III). 2. Retail store agreement: Begin selling to big-box retail stores. Two chain stores are interested in retailing KBI's products (Appendix IV). 3. Mountain High Bikes partnership: Partner with a similar company to expand the business. Cam has identified a potential opportunity with Mountain High Bikes, a similar company that has additional capacity (Appendix V). Cam has realized that before making a decision, he needs to consider the riskiness of each alternative and its forecasted profitability. Cam would like you to analyze each of the three alternatives from both a qualitative and quantitative perspective. Next, Cam would like you to consider the fit of each alternative with KBI's vision, mission, and values, and provide an overall recommendation for KBI based on your complete analysis. Cam would like to earn a rate of return of approximately 10%.

Appendix I KBI's vision, mission, and values Vision To be an iconic provider of high-quality, Canadian-made bikes Mission To continuously deliver value to customers by: ? manufacturing and delivering high-quality bicycles at reasonable prices ? using innovative materials to create a product that our competitors can't match ? employing sustainable business practices that respect our natural environment Values ? Commitment to customer satisfaction: We will put the needs of our customers first to deliver the ultimate in value and consumer happiness. ? Respect for our employees: We will ensure our employees feel valued and treated with respect at all times by providing a safe and enjoyable working environment. ? Family owned and operated: We will keep the business in the family, and as a family-run business we will take pride in the products we manufacture. ? Committed to community: We will never forget where we were founded, and we will always look for ways to give back to the community that has helped us grow.

Appendix II KBI financial information Production data and income statement (unaudited) For the 12 months ending June 30, 2021 Revenue and costs per unit Ultra Entree Dlux Ultra frame set Total Hours available1 2,450 1,750 525 750 Direct labour hours/unit 35 35 35 30 Revenue Unit price $1,800 $2,450 $2,750 $1,350 Cost of goods sold per unit Frame tubing 160 160 300 300 Parts kits 855 1,300 1,800 Materials2 40 40 75 75 Direct labour cost 700 700 700 600 Overhead costs 70 70 70 60 Gross margin/unit $ (25) $ 180 $ (195) $ 315 Units sold 70 50 15 25 (1.750) 9,000 (2.925) 7.875 12,200 Selling costs4 4,500 General and admin. expenses 19,500 Pre-tax profit (loss) $(11.800) Notes: 1. Cam and Bill are currently working at capacity, and total labour hours worked cannot be increased. 2. Consists of paint, clear coat, and decals. 3. Small parts, maintenance, and so on are applied on the basis of direct labour hours. Assume all costs are variable 4. Includes costs for website hosting, utilities, travel to bike trade shows, and so on. 5. Includes interest, Diane Shackelton's salary, and so on