BUS-1117 Business Simulation

Market Potential and Break-Even Exercise

Greg’s Mountain Bike Shop
March 4 2018
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Greg Benson has worked in a sporting goods store for several years
that sold bicycles and cycling equipment. Because of his abilities and
experience he had progressed to the position of cycle shop manager,
but he could see that the chances of becoming store manager were
slim, since the current manager was 35. Consequently Greg was
seriously thinking about the possibility of starting his own cycle shop in
his home town of Guelph Ontario. The population of Guelph had grown
to 131,794 with a large trading area surrounding it. There were
presently 12 cycle shops and 10 sporting goods stores that sold
bicycles and cycling equipment. Greg wondered if there was room for
another one.

During the past few years he had been saving his money for exactly
this plan of opening his own business. His savings and a small
inheritance totaled $58,000 which he hoped would be enough to turn
his idea into an opportunity. He had also completed a certificate in
Small Business Management at Conestoga College. The instructor had
stressed the importance of market research and mentioned several
sources of secondary data that could help in determining the total
market potential for a new business. As a result of his research he
determined the median household income was $70,880.21 and that
the average family spent 3.2% on sports equipment.

He wasn’t sure how useful the information was, but he was clear which
area of the sporting goods industry he wanted to specialize in. Since he
was an avid mountain biker and a great mechanic, he believed that he
understood the upscale mountain biking [MTB] market.

From his retailing experience he estimated that 18% of all sporting

goods sales were in bicycles and cycling equipment and 40% of all
bicycles and cycling equipment fell in the mountain biking segment.
His decision was also influenced by his visits to all 12 cycling shops
and the 10 sporting goods stores. He estimated that only 40% cycling
shop inventory was devoted to MTB and that each sporting goods store
dedicated an average of 3500 sq. ft. to cycling and 50% of that space
was focused on MTB. He felt that a shop of about 1800 sq. ft. would be
perfect size where he could offer the MTB market a much better
selection than was currently being offered by the existing stores. He
also believed that 55% of his sales would be related to products and
the remaining 45% would be related to bike repairs. Of the 55%, Greg
believed bike sales would account for 75% and the remaining would be
allocated to the sale of apparel.
Greg also anticipated being open 5 days a week and when considering
holidays, the shop would be open 234 days a year.
When determining which brand to support, Greg started speaking with
his vendor contact and narrowed it down to three brands with a great
reputation for quality.

Brand Retail Price Greg’s Cost as % of the

Retail Price
Cannondale $1450.00 60%
Rocky Mountain $1600.00 50%
Devinci $1250.00 40%

1. Can you help Greg estimate the total market size and potential
sales?

2. Can you help Greg determine if there is room for another bicycle
and cycling equipment store specializing in the mountain bike
market?

3. Generate a complete break-even analysis for all three brands

and in the process recommend the best brand partner for Greg’s
shop.

4. From a bottom up perspective, is it feasible for Greg to sell the

required number of bikes to operate a sustainable business?

Fixed Cost
$ 3,000.00
Rent + Taxes Month
Depreciation Year $ 8,000.00
Management Salaries Year $ 42,000.00
Taxes Year $ 5,500.00
Total

Variable Costs Hours Rate

Assembly 4 $ 25.00
Sales 5 $ 15.00
Shipping Per Unit
 $ 65.00

FIXED COSTS VARIABLE COSTS

Total Total
Price Point Breakeven Volume and Sales
Retail Price Unit BE Volume BE Sales

Contribution (units)
$ 1450
$ 1600
$ 1250
Profit for Sales of 400 Units
[(Price at % retail x 400) – Fixed Costs – (Variable Costs x 400)]
$ 1450
$ 1600
$ 1250