Professional Documents
Culture Documents
Accounting
CASE 26-4
BALDWIN BICYCLE
COMPANY
OUTLINE
1. Background
2. Statement of the Problem
3. Objectives
4. Alternative Courses of Action
5. Data Pertinent to Hi-Valu Proposal
6. Analysis
7. Conclusion
Background
BALDWIN BICYCLE COMPANY:
Ms. Susan Leister, Marketing VP
Baldwin Bicycle Company (BBC) had been in the
business for almost 40 years manufacturing above
average (quality and price) bicycles
In 1989, BBC lines includes 10 models ranging from
small beginners model to 12-speed adults model
Current annual sales of about US$10 million
Sales generated from independently owned toy stores
and bicycle shops. BBC had never before distributed
its product through department
Current operation of BBC is at 75% of one-shift
capacity
Background
HI-VALU COMPANY
Mr. Karl Knott, buyer
Hi-Valu Stores, Inc. operates a chain of discount
department stores
Hi-Valu Stores sales volume has grown to the
extent that it was beginning to add house
brand/private label merchandise to its product
lines
Background
THE PROPOSAL
Hi-Valu approached BBC to produce bicycles for the chain
bearing the name Challenger, to be priced lower than
their named brands.
Hi-Valu wanted the bikes different from the usual BBCs
existing models.
Hi-Valu wanted to hold the units on consignment in its
own warehouse and withhold payment until delivery to a
specific store. Hi-Valu would agree to take title to any
bicycle that had been in one of its warehouses for four
months, again paying it within 30 days.
Hi-Valu proposal is for a 3-year period, contract would be
automatically extended on a year-on-year basis, with at
least 6 months notice if the contract will not be extended
Background
Objectives
Alternative Courses of
Action
$ 39.80*
19.60
24.50
$ 83.90
*includes items specific models for Hi-Valu, not used in our standard
models
*Accountant says about 40% of total production overhead is variable;
125% of DL$ rate is based on volume of 100,000 per year
2.0
0.6
0.7
6.0
2.2
23.0%
Assumptions
for
Challenger-related
added
inventories (average over the year):
Materials: two months supply
Work in process: 1,000 bikes, half completed
(but all materials for them issued)
Finished goods: 500 bikes (awaiting next
carload lot shipment to a Hi-Valu warehouse)
Payment of Hi-Valus payables will be within a
month
Analysis
Q1
Q2
What
is
the
expected
impact
cannibalization of existing sales?
of
Q3
Q4
Q5
Q5
What is the overall impact on the company in
terms of:
b. Return on Sales
The effect is increase in ROS of
18%
Q5
Q5
What is the overall impact on the company in
terms of:
c. Return on Assets
Q5
What is the overall impact on the company in
terms of:
d. Return on Equity
Q6
What are the strategic risks and rewards?
RISKS
REWARDS
ACCEPT
Additional competition with
challenger bikes
Opportunity to supply to
department store chain
Q6
What are the strategic risks and rewards?
RISKS
REWARDS
DO NOT ACCEPT
Loss of additional profit
No additional competition
Q7
Conclusion
Thank You!