BALDWIN BICYCLE

COMPANY
PRESENTED BY
Group 11
Abhishek Acharya -03
Rishi Handa -42
Santosh Sah -45
Vinay Thakur-56
 Background
Baldwin 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 BBC

• Hi-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 Proposal
Decline 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 $39.80

Direct Labor 19.60

Overhead(@125% of DL) 24.50

Total $83.90

- 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.
 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.
 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
$23.09
Contribution Margin
Estimated Sales Unit 25000
Estimated Increase in profit $577,250
 Analysis

Baldwin Bikes
Selling 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

 Analysis

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.
 Analysis

Asset Related Costs- Challenger

Additional Inventory
Raw Material (25000/12)*2*39.80 165833
Work In Progress
Material 1000*39.80 39800
Coversion Cost 1000*(50%*(19.6+24.50) 22050
61850
Finished Goods 500*83.90 41950
Total Additional Inventory Asset 269633
Add. Inventory Carrying Costs 23%*Add. Inv Asset 62016

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

Total Additional Assets 269633+192271 461904

Total Additional Asset Related Carrying Costs 87972
 Analysis

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 354330
Tax @46% 162992
Net Additional Profit due to Hi-Valu offer 191338
 Analysis

Option 1: Accepting Hi-Valu Offer

Risk Reward
Entry into Departmental Chain
1. Dilution of Brand Value
Stores
2. Variation in Retail Price may
lead to dealer dissatisfaction/ Confirmed order for 3 years
migration
3. Additional competition due to
Utilization of idle capacity
low cost Challenger Bikes
 Analysis
Option 2: Declining Hi-Valu Offer

Risk
1. Loss of opportunity of
additional income
2. Loss of opportunity to enter
the new avenues
3. Continued decline in sales may Dealers profitability will be
happen because of poor
economy
4. Idle capacity will remain
unutilized
Reward
Brand Value will remain intact
No additional competition
sustained
Use Idle capacity to make new
products
 Analysis

7. 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