What costs are included in the cost of sales for Big O Tires franchise operations?
Big_O_Tires Franchise · 2025 FDDAnswer from 2025 FDD Document
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Acquisition Costs – Big O's wholesale invoice price to acquire Big O Program Products from suppliers (including but not limited to an Affiliate of Big O such as TBC Corporation) less any per unit rebates from tire manufacturers that are fixed, do not fluctuate per unit as purchase volumes increase or decrease and are paid under a rebate program that is more than twelve months in length ("Manufacturers Rebates"). All volume bonuses, quarterly sales allowances, freight allowances, partner and/or supplier bonuses, advertising, marketing or coop payments received from manufacturers or other suppliers or any other payments from suppliers or manufacturers that do not meet the definition of Manufacturers Rebates received by Big O do not reduce Big O's Acquisition Costs.
Adjusted Gross Sales – Gross Sales excluding Gross Sales (a) to National Account Customers and Key Account Customers, (b) of Farm Class Tires, (c) on Excess Service Department Sales, and (d) on which no royalty is due and not otherwise excluded from the definition of Gross Sales.
Adjusted Gross Sales Royalty Rate – The percentage applied to Adjusted Gross Sales to determine the Adjusted Gross Sales royalty fee, which percentage is the Matrix Royalty Rate.
Advertising – All advertising, promotional materials and programs, public relations programs and marketing programs, warranty programs, publications, research, programs or activities to promote the Big O System and/or the Licensed Marks and other activities, which are approved or administered by Big O or by Franchisee, or which utilize the resources of the National Marketing Program or local franchisee cooperatives or franchisee associations or which pertain to or benefit Big O Stores, the Big O System or the Licensed Marks generally.
Affiliate – Includes each Entity, which directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with Big O or Franchisee, as applicable.
Source: Item 23 — RECEIPTS (FDD pages 102–535)
What This Means (2025 FDD)
Based on the 2025 FDD, the cost of sales for Big O Tires includes several components that are subject to audits and potential adjustments. These components consist of Acquisition Costs, which are Big O's wholesale invoice price to acquire Big O Program Products from suppliers, less any per-unit Manufacturers Rebates that are fixed and paid under a rebate program lasting more than twelve months. Volume bonuses, quarterly sales allowances, freight allowances, and other payments do not reduce Acquisition Costs.
Additional factors impacting the cost of sales are warranty costs, which are estimated for each Big O I Tires line based on tire adjustment data from Big O's warranty database and expressed as a percentage added to the Acquisition Cost of tires. These percentages are analyzed and reviewed with a franchisee group annually. Other warranty expenses are allocated based on a fixed rate per unit, set at $0.00 per unit for 2025.
Distribution Costs also factor into the cost of sales, encompassing all expenses associated with handling, warehousing, and distributing Big O Program Products from Big O's warehouse facilities to the franchisee. These costs include payroll, payroll taxes, employee benefits, and general and administrative expenses related to operating distribution centers and delivering products. Furthermore, the Rebill Charge, a fee set by Big O for Rebill Tires acquired by the franchisee, is included in the cost of sales. As of the date of the agreement, this charge is $3 per tire.
Big O franchisees should pay close attention to these components, as they are subject to audit procedures and can be adjusted at the end of the year. Understanding how these costs are calculated and allocated is crucial for managing profitability and ensuring accurate financial reporting. Franchisees may also want to inquire about the specifics of the audit procedures and the criteria used to determine the End of Year Pricing Adjustment to better anticipate potential cost fluctuations.