Reference no: EM133496131

Bottas Bikes

Bottas was a hardworking and ambitious individual who had spent several years climbing the corporate ladder at a large manufacturing company. He had his eyes set on a promotion to a top managerial position, believing it to be the ultimate validation of his dedication and competence. However, despite his exceptional performance and unwavering commitment, Bottas was unexpectedly passed over for the promotion he had been striving for. Devastated and disillusioned, he found himself questioning the corporate world and the values it espoused.

Amidst his disappointment, Bottas stumbled upon a childhood passion that had long been dormant-cycling. He had always been captivated by the freedom and thrill of riding a bike, and this rediscovery sparked a new sense of purpose within him. Determined to chart his own path and create something meaningful, Bottas made a life-altering decision-he would open a bike shop.

With his savings of $9,000 and a reignited fire in his heart, Bottas immersed himself in researching and understanding the intricacies of the cycling industry. He intends on taking some courses on bicycle maintenance, attending cycling trade shows, and engaging with local cycling communities. He estimates this will cost around $15,000 over the next two years, but will save him from having to hire an additional bike mechanic- they are tough to find these days!

Armed his passion and entrepreneurial spirit, Bottas intends on opening a bike shop called Bottas Bikes in downtown Vancouver close to the Seawall, which loops around Stanley Park. Bottas believes the shop will become a hub for cycling enthusiasts, novices and experts alike.

Bottas intends on providing not only sales and repair services but also personalized advice to ensure that every customer walks away with a bike perfectly suited to their preferences and needs. His attention to detail, exceptional customer service, and genuine passion for cycling are what he believes will set Bottas Bikes apart from other bike shops in the city.

In his free time, Bottas has focused on building community engagement. He organized group rides, cycling workshops, and charity events, fostering a sense of camaraderie among his customers. To maintain profitability and sustain growth, Bottas Bikes needs to effectively manage costs, analyze its product lines, and make informed decisions based on reliable cost accounting information.

He has spoken with a parts supplier, Limano, and will purchase parts wholesale, conduct the assembly of the bikes and customize and sell them to the final customers within the city. With an eye for quality and design, he believes this will help differentiate his bikes and help them sell at a premium. He intends to sell bikes for a markup of 65% over their full cost.

To start the business, he will focus on the production of three popular bike types - mountain bikes, road bikes and tandem bikes. Based on Bottas's rough research, it appears that there is an annual demand of approximately 10,000 mountain bikes, 5,000 road bikes, and 2,000 tandem bikes.

Bottas has collected a laundry list of costs that he thinks will be relevant to the income statement projections for the company. He estimates that of the costs provided 30% are indirect and 70% are direct costs.

Of the costs above, Bottas wants to categorize direct material, direct labour, and manufacturing overhead. He's uncertain of the differences between product and period costs and wishes to understand these concepts a bit better. Bottas's friend Lewis tells him that the best way to allocate his overhead is on the basis of direct labour hours. Bottas trusts Lewis since he got the promotion in the corporate position.

Given his revenue mark-up and costs highlighted, he is also curious as to what the breakeven number of bikes are that he should push to sell. He has seen that bike mechanics charge around $60 to $100. He is likely to do the same, as he expects to spend about 7 hours a week on repairs for customers and clients. He will likely charge on a per hour basis plus parts.

Rent on the store is contracted for $60 per square foot for a total of 2,226 square feet at the corner of Georgia St and Denman Street. The expectation is that 50% of the space will be allocated to repairs and storage and the other 50% will be retail space for bikes sales.

A friend of Bottas, Emilia, works full-time as a barista and is always looking for a snack while finishing her long rides. She's interested in subleasing 25% of the total space to create a coffee shop with fresh baked healthy goodies to keep cyclists fueled on their rides- she thinks it will be a great addition to the space. Emilia has promised to split her profits equally with Bottas if he provides the space for her for free. She thinks it's a great way to bring people into the store and advertise the bikes.

Emilia anticipates she can generate $2,000 of monthly sales revenues to start (cost of sales will be a constant 25% of revenues), but expects the revenue number to double up each quarter during the first year, and flat for the months after that. She'll spend $1,500 a month on advertising (on a continual basis) for the store and help get the word out on social media through her network of Vancouver cyclists. She came in first place at the last Fondo Race and has had a bit of local stardom.

Without Emilia, Bottas would likely have to pay $175,000 up-front for the same level of impact for advertising. He also intends to make a shiny new website and get heavily involved in social media marketing by paying 8 influencers $7,000 each to promote his products and services for the next year. He wants some cool videos of himself cycling to promote his bikes as well. He wants to ask some film students to do this for free for exposure and practice of their craft. One of the students sent him an angry email, but Bottas believes she will get over it.

Hearing of his relationship with Limano, a competing company CRAM has come to Bottas and offered him a discount on the brake pads. Limano offers them to Bottas for $50 per unit and CRAM is offering them for $40 per unit. Each bike needs two brake pads. Limano has been in the bike business for 102 years and CRAM has been in business for 36 years and focusing on innovation. The CRAM parts are manufactured locally, but there are talks of moving the operations to Latin America. Limano's operations are located in Sri Lanka and there is usually a three to six week wait when parts are ordered, however they have always been reliable and provide Bottas with loyalty discounts on other parts provided.

Bottas wants some assistance in deciding whether to incorporate his operations or keep operating by himself. He's also thought of bringing in Emilia in as a partner, but doesn't know how much money he should ask her to invest. She seems to be willing and have a bit of capital from the Fondo winnings that she can contribute.

Lastly, Bottas wants to plan for the future and prepare a comprehensive budget for the next 12 months. Today is July 1 and he wants a rolling 12-month budget incorporating all the costs and items detailed. He estimates that sales will be constant, but will spike by 15% next May and continue steadily into the summer months.

All other costs are expected to stay relatively constant each month. He knows he hasn't given you all the information needed, and welcomes any additional information you can provide.

Having a pulse on the business is important so he is looking for your recommendation on how to evaluate each of the bike types and to have an idea of how to compare actual results to budgeted. He also wants detailed instructions on how to ensure he continually has up to date records and how to account for his business and what journal entries he'll routinely see as he receives raw materials from Limano, assembles, stores and sells bikes.

Question: Prepare a business report for Bottas Bikes, providing specific, detailed recommendations. Discuss all relevant issues, including pros and cons of each course of action. Outline any questions or inquiries that should be directed to Bottas and why the information is important to certain decisions.