Baldwin Bicycle Case

Important features of this case

BBC is a mid-range full-line bicycle manufacturing company.
It distributed exclusively through independently-owned

retailers & speciality bicycle shops.

Hi-Valu was a discount department store.
Hi-Valu had proposed a private-label agreement.
Result in cannibalization of an estimated 3000 units.
Terms of the proposal deviated from the standard practice.

Data pertinent to Hi-Valu proposal

1. Estimated first-year costs of producing Challenger bicycles (average unit costs)
a. Materials $39.80
b. Labor. $19.60
c. Overhead ( @125% of labor) $24.50
$83.90
2. Unit price and annual volume.
Hi-Valu estimates that it will need 25,000 bikes a year & proposes to pay an
average of $92.29 per bike for the first year).* price will increase in proportion
to inflation-specified in contract containing inflation escalation clause].

3. Asset related costs (annual variable cost)

a. Pretax cost of funds (to finance receivables/inventories)..11.5
b. Record keeping costs (for receivables/inventories)......2.0
c. Inventory insurance.0.6

d. State property tax on inventory.0.7

e. Inventory handling labor and equipment.....6.0
f. Pilferage, Obsolescence, breakage, etc..2.2

4. Assumptions for Challenger-related added inventories.

a. Materials: Two months supply
b. WIP: 1,000 bikes, half completed (but all materials for them issued)
c. Finished goods: 500 bikes (awaiting to get into Hi-Valus warehouse).

5. Impact on regular sales: Some customers compare the bikes and may
recognize Challenger bike as a good value bike when compared with other
bikes. In 1982, Baldwin sold approx. 98,791 bikes.
a. It will sell 1,00,000 bikes if it do not accept the proposal.
b. If it accepts the proposal, Baldwin will lose about 3,000 units per year.

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

Profit achieved by selling Challenger's bike
Selling price/unit

$92.29

Materials

39.80

Direct Labour cost

19.60

Overhead

24.50

Total Cost

83.90

Less: Fixed OH rate (0.6*OH)

14.70

Relevant cost/unit

69.20

Contribution margin/unit

23.09

No. of bikes produced/year

25000

Operating profit

577250

2. What is the expected impact of cannibalisation of existing

sales?
Expected amount of cannibalization: 's Bikes
Selling/unit

(10872000/98791)

110.05

Cost/unit

(8045000/98791)

81.43

Less: OHR/unit

24.5*0.60

14.70

Variable cost/unit

66.73

Contribution/unit

43.32

No. of units lost

3000

Estimated loss

129960

3. What costs will be incurred on a one-time basis only?

Cost of preparation of drawings

Arranging sources for fenders,
Seats, Handlebars, Tyres
Shipping Boxes (not the same as Baldwin's model).
The above in total costs about $5000. These are just

onetime costs.

4. What are the additional assets and related carrying costs?

Additional Assets and related Carrying cost ( In Dollars) - Challenger
Materials

25000/(12*2*39.80)

165833.49

Work in Progress

1000*39.80

39800

Finished goods

500*83.90

41950

Total Additional

247583.47

Inventory
Accounts receivable

25000*92.29/12

Total additional asset related cost

192270.83
439854.30

5. What is the overall Impact on the Company in terms of (a).

Profit (b). Return on Sales (c). Return on Assets (d). Return on
equity?
A) Profit
Additional Revenues

577250

One-time Costs

5000

Additional Assets related costs

439854.30

Loss on Cannibalization

129960

Income before tax

2435.7

ITR of 46%

1120.42

Estimated Additional Net Income

1315.28

B) Return on Sales
Return on sales = Net Income / Sales
Sales = 25000 * 92.29
ROS = $ 1315.28/2307250
ROS = 0.00057

c) Return on Assets
Return on Assets= Net Income/ Average Assets
ROA = $ 1315.28 / [(8092000+ 439854)/2 }
ROA= .00031

d) Return on Equity
ROE = Net Income/Equity
There will be increase in Assets as increase in Equity.
ROE = $1315.28/439854
ROE = 0.003

6. What are the strategic Risks and Rewards?

Risks : Additional competition with the Challenger and there

may be dropout of Current dealers.
Rewards : Full utilization of the plant and there will be
opportunities to supply to department store chains.

7. What should Ms. Leister do? Why?

The proposal of Hi-Valu will be good for the company as it

will provide additional revenue for Baldwin for the next 3

years.
This is a good opportunity for Ms. Leisters company to

finally enter the mainstream market or department store

chains like Hi-Valu.
They may initially be suppliers to chains; Baldwin could

later on push to have their own branded products in

department stores.

Thank you