>> Managerial Accounting
Brinkers' Bicycle Shop: A Special Order Decision
"This offer is the greatest thing that's happened to us since we started this business!"
-- Hans "Five-speed" Brinker, founding partner, Brinkers' Bicycle Shop
"Just slow down a minute, Five ... there could be a lot more to this decision than first meets the eye ..."
-- Wilbur Brinker, founding partner, Brinkers' Bicycle Shop
Hans and Wilbur Brinker turned their passion for tinkering with bikes, building customized bicycles, and racing into their own bicycle shop just two years ago. They currently produce: a standard model five-speed bicycle for amateur touring and racing, customized versions of that bicycle for more serious racers, and customized mountain and sand bikes. The standard model has become well known for its value, that is, for its high quality and reasonable price. It now accounts for nearly half of the shop's monthly sales. The following table contains details regarding the standard model's sales, costs and revenues.
The Brinkers also provide high quality, reasonably priced customization and repair services. The Brinkers' monthly sales are finally generating enough contribution margin to cover the shop's fixed costs and leave a small but reliable positive net operating income. In fact, the Brinkers are doing so well that they are on the verge of needing more shop and storage space. The business next door is willing to rent them a suitable space for $600 per month.
The Brinkers currently employ one full-time employee, Orville Quinn, to assist in organizing parts before assembling bicycles, assembling the bicycles themselves, and testing newly assembled bicycles for performance quality, as well as serving customers. In addition to collaborating with customers on their bicycles' designs, Quinn takes orders and takes customers for trial rides. Brinkers employ Quinn for eight hours per day, 25 days per month, at $15 per hour. On average, it takes about four hours to carry out all of these activities for a given sale, so Quinn can be considered able to assemble and test about two bicycles per day.
As evident from the quotes above, Five-speed and Wilbur Brinker are beginning to discuss an offer that they have just received from a small, local retail chain of sporting goods stores, Sports City. Sports City would like to purchase fifty of the standard model five-speed bicycle per month under a three month contract for $200 per bike. The bikes would be produced in three colors unique to Sports City and bear the Sports City logo. Sports City, in turn, would sell the bikes in their stores for $250 each. If the bikes sell well, Sports City will likely offer the Brinkers a second six-month contract for 75 bicycles per month under the similar terms.
Should the Brinkers accept this offer right away? What quantitative factors and what operational, qualitative or strategic factors should Five-speed and Wilbur take into account in making this decision?
Imagine that you are a summer intern working for the Brinkers. Please conduct an analysis of this situation and develop a recommendation for the Brinkers. Then write a memorandum to Hans and Wilbur Brinker in which you characterize the problem that they are encountering and identify its causes, summarize the analysis that you have conducted, and make your recommendation.
Analyze the case:
Your analysis should include the following steps, to the extent logical and possible, given the character of the case:
- Identify and describe or explain the problem that the managers of the organization in question are encountering. What has happened to make the managers realize that the problem has arisen? What is the likely cause of the problem? Why is the problem important?
- Analyze the problem, using tools and concepts that we have been studying, as well as your general business and management knowledge. Analyze the situation from a quantitative perspective, using the data available in the case, and from operational, qualitative and strategic perspectives. Use diagrams/tables to conduct your analysis and to report your findings. Your analysis should show that you can use these tools and concepts and the language of management accounting correctly and articulately.
- Draw conclusions regarding the nature of the problem and possible solutions, and develop recommendations for the managers in question.
Write a memorandum to the organization's managers that summarizes your analysis, findings and recommendations. The memo should contain:
- An introductory paragraph which explains the purpose of the memo and summarizes the analysis that you have conducted, your findings and your recommendations.
- One or more paragraphs that describe and explain in some detail the problem(s) that you have identified, the analysis that you have conducted, your findings and conclusions, and your recommendations. If you have made any assumptions in conducting your analysis, be sure to state them clearly and to justify them. Also, be certain to describe any limitations of your analysis, for example, data which is not available but would be useful.
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Brinkers’ bicycle shop, which at the outset, has been a very profitable venture so far has received a very big order from a local retail chain, Sports city. This order seems to call for doubling the production within the first 3 months and tripling it for a further 6 months. At the outset, it seems a very big boost to your business given the size of the order. But there are big underlying problems which need to be clearly taken care of, if the order is prove valuable to the organization.
First and foremost, the order calls for each product to be sold at just $200 while each has so far been sold at $300, a huge cut in margins by 33%. Secondly with variable costs per product being $100 hitherto, the new sales value of each being just $200 makes the variable costs’ margin spike up to 50% per bike, an increase of 17%.