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    Goup 11 Baldwin Bicycle Company Case Presntation

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    The document describes a proposal from Hi-Valu stores, a chain of department stores, to Baldwin Bicycle Company. Hi-Valu proposes that Baldwin produce bicycles under the Hi-Valu house brand "Challenger" at a lower price than Baldwin's models. Hi-Valu would purchase an estimated 25,000 bikes annually. The summary analyzes the costs, revenues, and risks/rewards of accepting or declining the proposal. It determines that accepting would provide Baldwin with additional profit, sales assurance, and capacity utilization, while declining risks continued sales declines. Therefore, the summary recommends that Baldwin accept the Hi-Valu proposal.

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    Goup 11 Baldwin Bicycle Company Case Presntation

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    508 views20 pages
    The document describes a proposal from Hi-Valu stores, a chain of department stores, to Baldwin Bicycle Company. Hi-Valu proposes that Baldwin produce bicycles under the Hi-Valu house brand "Challenger" at a lower price than Baldwin's models. Hi-Valu would purchase an estimated 25,000 bikes annually. The summary analyzes the costs, revenues, and risks/rewards of accepting or declining the proposal. It determines that accepting would provide Baldwin with additional profit, sales assurance, and capacity utilization, while declining risks continued sales declines. Therefore, the summary recommends that Baldwin accept the Hi-Valu proposal.

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    The document describes a proposal from Hi-Valu stores, a chain of department stores, to Baldwin Bicycle Company. Hi-Valu proposes that Baldwin produce bicycles under the Hi-Valu house brand "Challenger" at a lower price than Baldwin's models. Hi-Valu would purchase an estimated 25,000 bikes annually. The summary analyzes the costs, revenues, and risks/rewards of accepting or declining the proposal. It determines that accepting would provide Baldwin with additional profit, sales assurance, and capacity utilization, while declining risks continued sales declines. Therefore, the summary recommends that Baldwin accept the Hi-Valu proposal.

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    Download as pptx, pdf, or txt
    508 views20 pages

    Goup 11 Baldwin Bicycle Company Case Presntation

    Uploaded by

    v
    The document describes a proposal from Hi-Valu stores, a chain of department stores, to Baldwin Bicycle Company. Hi-Valu proposes that Baldwin produce bicycles under the Hi-Valu house brand "Challenger" at a lower price than Baldwin's models. Hi-Valu would purchase an estimated 25,000 bikes annually. The summary analyzes the costs, revenues, and risks/rewards of accepting or declining the proposal. It determines that accepting would provide Baldwin with additional profit, sales assurance, and capacity utilization, while declining risks continued sales declines. Therefore, the summary recommends that Baldwin accept the Hi-Valu proposal.

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

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