Ch.apter 26 Short-Run A{temotiye,Chaice Decisio4s.

859

tsaldwin Bicycte Company*

fu \f ar' 1989 Suzalne Leister, marketing vicepresident
mr gaidwin Bicycle Company, was mulling oyer the
dscussion she had had the previous day with Karl
[.r:rrn. 3 buyer from Hi-Valu Stores, lnc. Hi-Valu oper-
m.-d a chain oldiscount department stores in the Norlh-
we=t- Hi-Valu's sales volume had grown to the extent
dni: it u.as beginning to add "house-brand" (also called
*:r:', ate-label") merchandise to the product
lines of
ire,eral of its departments. Mr. Knott, Hi-\,hlu's buyer
tflm sporting goods, had approached Ms. Leister about
fre prossibility of Baldwin's producing bicycles for Hi-
tTlu- The bicycles would bear the name "Cha11enger."
,mi:,-h Hi-Valu planned to use for a1l of its house-brand
,ft)rting goods.
Baldrvin had been making bicycles for almost 40
i,ears. In 1989 the company's line included l0 models,
ruging from a small beginner's model with kaining
- i:pyright O Professor Robert N. Anthony.
whsels to a deluxe l2-speed adult's model: Sales were
cur:rently at an annual rate of about $10 million. (The
company's 1988 financial statements appear in Ex-
hibit 1.) Most of Baldwin's sales were through inde-
pendently owned toy stores and tricycle shops. Bald-
win had neyer before distributed its products through
department store chains of any type. Ms. Leister felt
that Baldwin bicycles had the image of being above
ayerage in quality and price, bui not a "top ofthe line"
product.
Hi-rrhlu's proposal to Baldwin had features that
made it quite different from Baldwin's normal way of
doing business. First, it was very important to Hi-Valu
to have ready access to a large inventory ofbicycles,
because Hi-Valu had had great difficulty in predicting
bicycle sales, both by store and by month. Hi-Valu
wanted to carry these inventories in its regional ware-
houses, but did not want title on a bicycle to pass from
Baldwin to Hi-\hlu until the bicycle was shipped from
one of its regional warehousss to a speclfic Hi-Valu

EXHIBIT 1 Financial Statements (thousands of dollars)

Aiseti Liabilities and Owhertl, Equit,

Cash $ 342 Current liabilities $3i4,78
Ac(ounts receivable 1,359 Noncurrent liabi!i!iq1
lnventories 2!756 Total liabilities, , , r,,,41,990
Plant and equipment (net) '3,635 u^wnersl eqilityr i. ir l
,'3;1:02
q8,q92
@E

Sales revenues , .
s_1ro,8,72
Cost of sales i8;045
Cross margin
.2i18;27
Other expenses 2;354
lncome before taxes 473
lncome tax expense 218
Net income $ 2ss
 860 Part2 ManagententAccounting

EXHIBIT 2 Data pertinent to l&yalu proposar Notes

taken by suzanne Leister

t.$lgg;111ryir46;rs;

Mdterials".-,.: r, I ]:,lr'r::tl lr,r.:.'.

Dif€et lab*r r,,,'t .,:',,.,,,.,', .,- $39.80r

(e I9'60,'
Over,head, i.ZS% oi; dirg Jabo$
.21,5Q,
$83.9or
i Inclr4esitenx speiiftrtn*a"iifstn'!'.yallr,roios**ir+uriraadardmodeis.
*
Accountant says about 40 Dercenr,of ., .

rolal production or mhcad

ofDL$ rare is based on rolumc of ,, r *,r0,", l25 pucenr
100.000 bi.y"l., p*"r"rr. "" """,
"L,

';'"ild$'fi#l&[:l"1lTtrlifrj[*;::,H#*llilp:[:*r,;,,pp,n"i,,1,,",,'ij.ooorbased
on
3' unit price ond onnuatv elrrtitii*;lti@res ilwirl,nieJ)i,ooo.q1y
1' r:
"'I {bas d n the assurneo.mxor*J'l#inir*13q* * g.szzs.pii6ke ayear,and p:oposes ro pay us
a{li'inflation esEalarion clause for rhe {irst y*a" bonrr.t
such lriiiiri.. ro conra&r
:..,:r eestlrshowrr initem yrr i"1,1gi!"1"-;fi#;", ,o inflatio;caused
,..-'.1'IX[I-Knott
1, abovel thq!, t" isz?s,.unA Sa:.go i,niiJ. rr*, ,,
effect, 1so35tant_dolla/,
increases in

lntirngted thattuie,was]very rittre,,i{ ;d.;;rns reuwuy i*,rr*'!g},io proposed

t!y, ini
',,4;, asset:doted iosts (annuarvariable
..: ::: . ., ., .
coitsrlusapql.ent of dor.tar value
assets)l
of
,,pret!{co$tsffundsitofinancerqeqiyab,lesor,inventones)
,

. ,
:. .. .:. ::: :.: Recordkeeping,iosts (foJ r:eqvablesr.il_"*;,_, I1.5
Z.O
,. ',,,i Statepidperty *,;nren!o1y1,
t9
#il?yffit'l?":?":::i::uipment 2'2"'6
'"r',-Materialsi'twaimon-rhsr:iupl ,'.-'l:-::,,ir,'';;::_: year):
:.,:il"'11.r"url, ,
.,,,.,. ,,:,,,,:
.
;r1r1-t'q{ii6'nrocess:rt,00Q b!(s,'t ar,.omplqtqd'qbgt al:rnareriars'{orthenr
r,,,-Fitirhed'goodr: 50o ukel {,gwaiiing-f"Ir-rlr,qndrrurrrn,p*"t,i;.i ixued}.:: ,

*r, house). :r ,
"iffifi;;i?f{ryitiqa:;#ffi,;}'#:x,fiiiffre
at a hiqhet'ptice.;n?,nooifiain
*i.u,uto
kev,.
:
!
""campetitrlq) L,y or t,.i.r* ri"i*r'i*r,ras. *u
,,, gue5s:.is that our:sates
gver: the,next tfrqeelrealyifl,,b_.;b;i;do,OoO
rtrf,,is-iii,nii*. My be*
U,tu, ayear if wq forso the Hi-vdu
Siil;,ji,,ryi"'i'i:iJ:l.llilix;Jrff::i:*"i:1,,^TnTii,',""I,i11,1,,,*
distribution is quite stronsin Hi_varr*iir#.;#ti:,".,:ffil:ilTi.'":?'ffii;#i:;ffiilffi"
vo,ume a ye,,, srnc" our rerd
few of our current dearers might
drop oui iin"'ii *,"y rino ort
we,rJ ,ri,rg bikes for Hi_Vairr.

store. At that point" Hi-\ra!

would regard the bicycle
as having been purchased dollar gross rnargin on each bicycle
from eafdidrl a*A wortO sold_the
pay for it within 30 days. Howwer, ffi_V"ftr *"rlid nale being that Challenger bike
,ut", *oria ,ul.
agree tolake title to any bicycle from the sales of the name_brand
its warehouses for four m.,r.*rr"
-;;;:::.;::""""'
that on" J
had U*"n ln
bikes. Thus. H:-
yanted ro purchase bikes from Baldwin
r,i*r.,.- rn r - r r
months, again paying for it ar i;;.
r,*':.:.?,
bike
jY::
would rernain
Knot
:'t ,"*io"ui
Y' in a Hi_Valu *"t"jti,t;;
; ;;:;
rnirffirl
l,hu,
,1._*.hglesate prices
"t
lnrough tsaldwin's usual channels.
."r;"r;;t.;il;
for two months.
Second Hi-Valu wanted to sell
its Challenger bicy_
cles ar lower prices rhan the
nur"_b*;J;jir.,., ,,
carried and yet still earn approximately
the same
 ', Chapter26 Sltort-R*nAltewatiie:Chaice,Dei;s,ions' A61

trat different, and the tires would have to have the
"Chal I enget'' molded, into, their sidewalls. Also.
bicycles would have 1o be packed inlboxe$ printed
the Hi-l/alu and Challenger names'; Ms. Leister
that possibly these requirements would'in.
Baldwin's purchasing, iwentorying; and pro-
Sulanne L€istet,,iealized,'.s5"',na"OdU 1o da, sorne
prelirniaaryr: finaqcial, aaat sis. of ihis'lpioposal ,6e;
fore, having anY'fljrlherrdiscussions #jh: Karl Xnoti:
She:had.wiittoh {in:'apad the infoimtiim,ihe ntd gath,
ered to,:,use in her iaftial'analysis; *iis,:ih6or*ation: iS
sumnai:izedinExhibii2,'' ,r,
:': '::: : :" .irj'j'i I

costs over and above the added costs'that would

ircurred fot a comparable increas,e in volume- for
QueStions
's regular products.
On the positive side, Ms. Leister was acutely aware
,l, Whatris the,expected added profif fiorn fhe Chal:
the "bicycle boomr had flatlened out, and this plus
economyhad caused Baldwin's sales volumeto
len€erlioe? ;' ',
:,1,

2, What,is,the expected impact.of cannibaliiation of

ffi the past two years. As a result, Baldwjn currently
existing sales?
ms operating its plant at about 75 perce*t of o*e-shift
qacity. Thus, the added volume from Hi:valu,s puf. 3.: W-hat eosts will be ineurred on a one-time basis
rtases could possibly be very attractivs. If agieement cnl1r?" "'"
ouuld be reached on prices, Hi-Valu would sign a can- 4. What are the additiolal,assets and related carrying
frar-t guarailteeing to Baldwin that Hi-Valu woald buy ' 'C0sts?'' 'j,,.
b house-brand bicycles only from Baldwia for a 5. :Wlttr tr ,ne oVerall impact on ths,comparyinterms
&ce-year period. The conlract would thel:be auto- of(6) profits; (&} retum on sales; fC) return:on as,
mtically extended on year-to-year basis, unless one ' sets; and ({ ietur$ on eqUltt?
lrutv gave lhe other at least six-monthsllnotice that it 6. [!af aro the strategic risks and rewards? , ,

did not wish to extend the contract.

7., Whatshouldthecompanl4do?:W1ry?' | :''