This is the suggested answer to the Contribution Analysis exercise on Colorado Ricardo Mountain Bikes.
Contribution Per Unit
Selling price $1,200 minus variable cost $700 = $500 contribution per bike.
Break-Even Point
Fixed costs $1,800,000 divided by contribution per unit $500 = 3,600 bikes. Colorado Ricardo must sell 3,600 bikes just to cover its fixed costs.
Margin of Safety
Current sales of 4,000 bikes minus the break-even point of 3,600 bikes = 400 bikes, or 10% of current sales.
Key point: a 10% margin of safety is thin, and three years of falling sales means Colorado Ricardo is heading toward its break-even point, not away from it – if the decline continues at a similar rate next year, the business could tip into a loss.
This is the sharpest possible illustration of why the strategic options explored in the Ansoff’s Matrix exercise matter – Colorado Ricardo has limited room left to simply wait for sales to recover on their own.
