BALDWIN BICYCLE COMPANYPRESENTED BY

Group 2

BackgroundBaldwin Bicycle Company

Baldwin Bicycle Company has been in the cycle manufacturing business for last 40 Years.

Mrs. Suzanne Leister is the Vice President(Marketing) of the company.

In 1989, Company has 10 models ranging from a small beginner's model with training wheels to a deluxe 12-speed adults' model.

Annual sales is about $10 million.Sales were mainly through independently

owned toy stores and bicycle shops.

Back Ground Hi-Valu Stores

Hi- Valu stores operates a chain of Departmental Stores.

Its sales volume had grown to the extent that it was beginning to add “house brand” merchandise to the product line of several of its departments.

Mr. Knott is the Hi-Valu’s buyer for sporting goods.

Hi-Valu’s Proposal to BBCHi-Valu approached BBC about the possibility of

Baldwin’s producing bicycles for Hi-Valu.The Bicycle would bear the name “Challenger”

which Hi-Valu is planned to use for all of its house-brand sporting goods.

They want to purchase the Bikes at a lower rate from BBC’s present wholesale price and they also want to price the bike lower than the existing models of BBC.

They also want the bikes to be somewhat different in appearance from the other BBC models.

Contd. Hi-Valu to hold the consignment in its own

warehouse but withhold the payment until delivery to a specific store.

Hi-Valu would agree to take title of any of the bicycle that has been in any of its store for 4 months.

Initially the agreement is for three years. Contract would then be automatically extended on year-to-year basis, unless one party gave the other at least six months’ notice that it did not wish to extend the contract.

Hi-Valu would pay for the bike within 30 days of its purchase.

Market scenario

Bicycle boom has flattened out. Poor economy has caused Baldwin’s sales

volume to fall the past two years. Baldwin is currently operating its plant at

about 75% of one shift capacity. Expected Sales over the next three years will

be about 100000 bikes a year.

Objective To understand the effects of accepting this

proposal on the company.

To take an informed decision on the High-Valu Proposal i.e.

Accept the ProposalDecline the Proposal

Data related to Hi-Valu Proposal Estimated First Year Cost of producing the Challenger

Bicycle (average unit costs, assuming a constant mix of models)

- Material Cost includes items specific for Challenger and not for other models

- Accountant says about 40% of total production overhead cost is variable; 125% of DL overhead rate is based on volume of 100000 bicycles per year.

Material $39.80

Direct Labor 19.60

Overhead(@125% of DL)

24.50

Total $83.90

Data related to Hi-Valu Proposal One time added cost of approximately $5000. Estimated 25000 bikes a year. Unit Price of $92.29 per bike for the first year. Asset Related Cost (annual variable cost, as % of

Dollar value of asset)

Pretax cost of funds (to finance receivables or inventories)

11.5%

Record Keeping costs( for receivables or inventories)

2.0%

Inventory Insurance 0.6%

State Property tax on inventory 0.7%

Inventory handling labor and equipment 6.0%

Pilferage, obsolescence, damage, etc. 2.2%

Total 23%

Data related to the Hi-Valu Proposal Assumptions for Challenger related added

inventories (average over the year)

Materials : Two months supply Work in Progress : 1000 bikes, half completed (but

all material for them used) Finished Goods : 500 Bikes (awaiting Next carload –

lot shipment to a High-Value ware house)

Impact on Regular Sales It is expected that Baldwin will lose about 3000 units

of their regular sales volume a year if they accept this proposal.

Analysis1. What is the expected added profit from the Challenger

line ?2. What is the expected impact of cannibalization of

existing sales?3. What costs will be incurred on a one time basis?4. What are the additional assets and related carrying

costs?5. What is the overall impact on the company in terms of a) Profits b) Return on Sales c) Return on Assets d) Return on Equity6. What are the Strategic risks and rewards?7. What should the company do? Why?

Analysis

Challenger Bikes Selling Price per Unit $92.29 Materials $39.80 Direct Labour 19.6 Overhead (40% Variable) 9.8 (40%*24.50) Total $69.20 Per Unit Relevant Cost $69.20 Estimated Additional Contribution Margin $23.09

Estimated Sales Unit 25000Estimated Increase in profit $577,250

1. What is the expected added profit from the Challenger line ?

Analysis2.What is the expected impact of cannibalization of

existing sales?

Baldwin BikesSelling Price Per Unit 10872000/98791 110.05

Cost of Sale Per Unit (A) 8045000/98791 81.43

Less Fixed OHR Per Unit (B) 60%*24.50 -14.7

Variable Cost Per Unit (A-B) 66.73

Contribution Margin Per Unit 43.32

Number of Units Lost per year 3000

Annual Estimated Loss Due to Cannibalization $ 129948

Analysis3. What costs will be incurred on a one time

basis?

One time added cost of $5000 covering costs of

preparing drawings and/or arranging sources for

fenders, seats, handlebars, tires, and shipping

boxes that differ in from those used in standard

models.

Analysis4. What are the additional assets and related

carrying costs? Asset Related Costs- ChallengerAdditional InventoryRaw Material (25000/12)*2*39.80 165833Work In Progress

Material 1000*39.80 39800Coversion Cost 1000*(50%*(19.6+24.50) 22050

61850Finished Goods 500*83.90 41950Total Additional Inventory Asset 269633Add. Inventory Carrying Costs 23%*Add. Inv Asset 62016

Account ReceivablesA/c Recv (30 days payment cycle) (25000/12)*92.29 192271Additional Cost for A/C Recv 13.5%*A/C Recv 25957

Total Additional Assets 269633+192271 461904Total Additional Asset Related Carrying Costs 87972

Analysis5. What is the overall impact on the company in

terms of: a) Profit: Net Increase in contribution Margin due to Hi-Valu offer 577250

One time Cost (5000)Additional Asset Related cost (87972)Loss On Cannibalization (129948)Income Before Tax 354330Tax @46% 162992Net Additional Profit due to Hi-Valu offer 191338

Analysisb) Impact on the Company in terms of

Return on Sales (ROS) = Change in Income = 191338 = .097

(9.7%) Change In Sales 1977100

Without Hi-Valu

With Hi-Valu

Impact of Hi Valu

Sales Revenue 11005000 12982100 1977100Net Income 274102 465440 191338

RoS 0.025 0.036 0.097

Projections

Analysisc) Impact on the Company in terms of

Return on Assets (ROA) = Net Income = 465440 = .054 (5.4%) Total Asset 8553904

Yr 1988 Yr 1989Asset 8092000 8553904Net Income 255000 465440

RoA 0.032 0.054

Analysisd) Impact on the Company in terms of

Return on Equity (ROE) = Change in Income = 210440 = .456

(45.6%) Change In Equity 461904Yr 1988 Yr 1989 Change

Equity 3102000 3563904 461904Net Income 255000 465440 210440

RoE 0.082 0.131 0.456

Analysis6. What are the Strategic risks and rewards?

Option 1: Accepting Hi-Valu Offer

Risk Reward

1. Dilution of Brand Value Entry into Departmental Chain Stores

2. Variation in Retail Price may lead to dealer dissatisfaction/ migration

Confirmed order for 3 years

3. Additional competition due to low cost Challenger Bikes

Utilization of idle capacity

AnalysisOption 2: Declining Hi-Valu Offer

Risk Reward

1. Loss of opportunity of additional income

Brand Value will remain intact

2. Loss of opportunity to enter the new avenues

No additional competition

3. Continued decline in sales may happen because of poor economy

Dealers profitability will be sustained

4. Idle capacity will remain unutilized

Use Idle capacity to make new products

Analysis7. What should the company do? Why?

As per our opinion BBC Should ACCEPT Hi-Valu offer as BBC will have both Quantitative as

well as Qualitative benefits. They can further

renegotiate with them on flexibility on payment

terms, inventory norms and also try to push their

BBC branded products in long run through

departmental stores like Hi-Valu.

Quantitative Benefits Qualitative Benefits

Additional Contribution Margin

of $577250

Assured sales for next three

years

Additional Profit of $191338 Sales from the new Challenger

Bikes will offset decreasing

Baldwin Sales because of poor

economy

Higher ROA, ROE, ROS First mover advantage to enter

into departmental stores

Capacity Utilization Increased

from 75% to 92.45%

Thank You