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Exercise – Direct and indirect costs

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This exercise asks you to apply Direct and Indirect Costs to Colorado Ricardo Mountain Bikes.

The Scenario: Colorado Ricardo Mountain Bikes

Colorado Ricardo Mountain Bikes was founded by Ricardo Francisco, a keen off-road cyclist who grew frustrated with bikes breaking down under the strain of the Colorado mountains. After years of trial and error, he built a bike tough enough to survive the terrain and named it the “Colorado Ricardo”. Word spread quickly among local riders, and Ricardo gave up his day job to build and sell bikes full-time from a small workshop outside Denver.

A bike-hire company has approached Colorado Ricardo about a bulk order of 50 bikes at a discounted price. Before agreeing, Ricardo wants to understand exactly which of his costs are driven by this specific order and which would carry on regardless.

Your task: Classify the following costs as direct or indirect: frame materials, direct labour to build each bike, factory rent, Ricardo’s own salary, and marketing spend. Explain why this distinction matters when Ricardo decides how low a price he can accept for the bulk order.

Direct costs traceable to one product, indirect costs shared across the whole business

Once you have drafted your own answer, compare it with Marketing Teacher’s suggested answer.