Katy Davis has had a passion for cycling for years. She has decided to explore turning her passion into a 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, Katy Davis thinks she has raised sufficient start-up funding through family members and a somewhat generous friend. Katy’s first option is to focus on an area of the market she believes is a bit underserviced: bikes for mid-teens, a market she labels youth. She has made a set of estimates as shown in Exhibit 1.

Required
(a) Calculate the contribution margin per bike.
(b) Calculate the number of bikes required to break even.
(c) Based on the evidence, will this venture be profitable? Briefly explain.
(d) Are you able to provide an estimate of current profits?

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DAVIS CYCLES Exhibit 1 Estimates for Year 1 Single product: youth bikes Item Bike sales volume Average selling price Average variable cost of bike (purchase of basic bike, additional assembly-related costs) Sales and marketing General and administration expenses Occupancy and rental expenses Direct fixed workshop and bike costs 2400 bikes $600 per bike $350 per bike $92000 $130 000 Additional information 60% variable; 40% fixed Fixed $176000 Fixed $90.000 Fixed