Assignment Paper

Velo City was set up four years ago by two sisters, Jenny and Jess Wilson. The company produces high
quality hand-built bicycles for both adults and children, which they have sold largely through specialist
retailers in the UK. Velo City has a small factory just off the Holloway Road in Islington and employs about
20 people. Jenny Wilson is responsible for production decisions, while Jess looks after marketing; two years
ago they recruited a former University friend of theirs, John Moto, to look after financial matters and he is
now a partner in the business.
The company performed well financially until the second half of 2018, when UK economic growth slowed
post-Referendum and consumer spending on more expensive bicycles began to decline. The situation
worsened during the course of 2019 and John now believes that Velo City is making a small loss at current
production levels. Both Jenny and Jess feel that some important decisions need to be made.
The factory has a capacity of 100 bicycles per week; until mid-2018, about 75% of this production capacity
was being used, but this has since been running at 64% (or 64 units per week) including the whole of 2019.
Assume an equal production split between adult’s and children’s bicycles and that all bicycles are sold. At a
recent meeting of the management ‘team’ (in the local coffee bar), John suggested that Velo City should
consider reducing its capacity more closely in line with lower demand for the company’s products. He
believed that with reduced capacity, profitability might be improved because of the elimination of some fixed
costs. Fixed costs are currently estimated to be running at about £45,000 per month. However, Jenny is more
reluctant to cut production capacity, especially as there has been some evidence of a slow, upward trend in
demand over the last three months. She has asked the other two whether it might be possible to cut costs
without reducing production capacity.
Meanwhile, Jess has become increasingly concerned that Velo City might be losing its competitive
advantage, which has thus far been based on the high quality of its hand-built bicycles. She has discovered
that very similar bicycles of almost the same quality are now being imported from China and sold by the
major retail chains at prices about 30% cheaper than Velo City’s own products.