Baldwin Bicycle Company Case Presntation

PRESENTED BY Group 2

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 1.

2. 3. 4. 5.

6. 7.

What is the expected added profit from the Challenger line ? What is the expected impact of cannibalization of existing sales? What costs will be incurred on a one time basis? What are the additional assets and related carrying costs? What is the overall impact on the company in terms of a) Profits b) Return on Sales c) Return on Assets d) Return on Equity What are the Strategic risks and rewards? What should the company do? Why?

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

Challenger Bikes Selling Price per Unit Materials Direct Labour Overhead (40% Variable) Total Per Unit Relevant Cost Estimated Additional Contribution Margin Estimated Sales Unit Estimated Increase in profit

$92.29 $39.80 19.6 9.8 (40%*24.50) $69.20 $69.20 $23.09 25000 $577,250

Analysis 2.What is the expected impact of cannibalization of existing sales?

Baldwin Bikes Selling Price Per Unit Cost of Sale Per Unit

10872000/98791 (A)

Less Fixed OHR Per Unit (B)

110.05

8045000/98791

81.43

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 3. 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.

Analysis 4. What are the additional assets and related carrying costs? Asset Related Costs- Challenger Additional Inventory Raw Material (25000/12)*2*39.80 Work In Progress Material 1000*39.80 39800 Coversion Cost 1000*(50%*(19.6+24.50) 22050 Finished Goods Total Additional Inventory Asset Add. Inventory Carrying Costs Account Receivables A/c Recv (30 days payment cycle) Additional Cost for A/C Recv

61850 41950 269633 62016

500*83.90 23%*Add. Inv Asset

(25000/12)*92.29 13.5%*A/C Recv

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

165833

192271 25957 461904 87972

Analysis 5. What is the overall impact on the company in terms of: a) Profit:

Net Increase in contribution Margin due to Hi-Valu offer One time Cost Additional Asset Related cost Loss On Cannibalization Income Before Tax Tax @46% Net Additional Profit due to Hi-Valu offer

577250 (5000) (87972) (129948) 354330 162992 191338

Analysis  b) Impact on the Company in terms of Return on

Sales (ROS) = Change in Income Change In Sales

Sales Revenue Net Income RoS

= 191338 = .097 (9.7%) 1977100 Projections Without HiWith HiImpact of Hi Valu Valu Valu 11005000 12982100 1977100 274102 465440 191338 0.025

0.036

0.097

Analysis  c) Impact on the Company in terms of Return on Assets (ROA) = Net Income Total Asset

= 465440 8553904

Asset Net Income RoA

= .054 (5.4%)

Yr 1988 Yr 1989 8092000 8553904 255000 465440 0.032

0.054

Analysis  d) Impact on the Company in terms of Return on Equity (ROE) = Change in Income Change In Equity Equity Net Income RoE

= 210440 = .456 (45.6%) 461904 Yr 1988 Yr 1989 Change 3102000 3563904 461904 255000 465440 210440 0.082

0.131

0.456

Analysis 6. 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

Analysis Option 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

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

Assured sales for next three years

$577250 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