Baldwin Bicycle Company PPTFINAL

8/16/2019 Baldwin Bicycle Company PPTFINAL

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Management

Accounting


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CASE 26-4

BALDWIN BICYCLE

COMPANY


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OUTLINE

! Bac"g#oun$

2! Statement o% t&e P#o'(em

)! O'*ecti+e,

4! A(te#nati+e Cou#,e, o% Action

! Data Pe#tinent to .i-/a(u P#o0o,a(

6! Ana(1,i,! Conc(u,ion


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Bac"g#oun$

BALDWIN BICYCLE COMPANY3

• Ms. Susan Leister, Marketing VP• Baldwin Bicycle Company (BBC) had een in the

usiness !or almost "# years manu!acturing ao$ea$erage (%uality and price) icycles

• &n ', BBC lines includes '# models ranging !romsmall eginner*s model to '+speed adult*s model

•

Current annual sales o! aout -S'# million• Sales generated !rom independently owned toy stores

and icycle shops. BBC had ne$er e!ore distriutedits product through department

• Current operation o! BBC is at /01 o! oneshi!t

capacity


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Bac"g#oun$

.I-/ALU COMPANY

• Mr. 2arl 2nott, uyer• 3iValu Stores, &nc. operates a chain o! discount

department stores• 3iValu Stores* sales $olume has grown to the

e4tent that it was eginning to add 5house

rand67pri$ate lael merchandise to its productlines


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Bac"g#oun$

T.E POPOSAL• 3iValu approached BBC to produce icycles !or the chain

earing the name 5Challenger6, to e priced lower thantheir named rands.

• 3iValu wanted the ikes di8erent !rom the usual BBC*se4isting models.

• 3iValu wanted to hold the units on consignment in itsown warehouse and withhold payment until deli$ery to a

speci9c store. 3iValu would agree to take title to anyicycle that had een in one o! its warehouses !or !ourmonths, again paying it within :# days.

• 3iValu proposal is !or a :year period, contract would eautomatically e4tended on a yearonyear asis, with at

least ; months notice i! the contract will not e e4tended


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Bac"g#oun$

CUENT STATE O5 T.E MAET

• Bicycle oom has


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Statement o% t&e P#o'(em

>he proposal o! 3iValu came at a time whenBBC is operating at reduced capacity.

BBC needs to e4amine the $iaility andpro9taility o! this $enture.


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O'*ecti+e,

• >o understand the e8ects o! 3iValu proposalto BBC.

• >o e ale to pro$ide a sound decision onthe 3iValu proposal.


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A(te#nati+e Cou#,e, o%Action

• ?ccept 3iValu proposal

• @ecline 3iValu proposal


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Data Pe#tinent to .i-/a(uP#o0o,a(

=stimated 9rstyear costs o! producing Challengericycles (a$erage unit cost, assuming a constant mi4

o! models)A

Materials :.#

@irect Laor '.;#

$erhead (D '+01 o! direct laor) +".0# 7 8)!9:

*includes items specifc models or Hi-Valu, not used in our standardmodels*Accountant says about 40% o total production overhead is variable;!"% o #$ rate is based on volume o 00,000 per year


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• ne time added cost o! appro4imately 7;:::

• -nit price and annual $olumeA• =stimated 2;::: 'i"e, a 1ea#• Payment o! an a+e#age 792!29 0e# 'i"e !or

the 9rst year


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• ?sset related cost (annual $ariale cost as percent o!dollar $alue assets)

Preta4 cost o! !unds (to 9nance recei$ales or in$entories)''.01Eecordkeeping cost (!or recei$ales or in$entories) +.#

&n$entory insurance #.;State property ta4 on in$entory #./&n$entoryhandling laor and e%uipment ;.#

Pil!erage, osolescence, reakage etc. +.+

2)!:<


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• ?ssumptions !or Challengerrelated addedin$entories (a$erage o$er the year)A•

MaterialsA two months* supply• Fork in processA ',### ikes, hal! completed

(ut all materials !or them issued)• Ginished goodsA 0## ikes (awaiting ne4t

carload lot shipment to a 3iValu warehouse)• Payment o! 3iValu*s payales will e within a

month


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&mpact on BBC*s regular salesAa. &n ', BBC sold ,/' ikes

. Ms. Leister*s est guess is that sales o$er thene4t three years will e aout '##,### ikes ayear i! they !orego the 3iValu deal.

c. &! they accept it, they think they will lose aout:,### units o! their regular sales $olume a year.

d. >hese estimates do not include the possiilitythat a !ew o! their current dealers might droptheir line i! dealers 9nd out that they*re makingikes !or 3iValu.


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Ana(1,i,

'. Fhat is the e4pected added pro9t !rom the ChallengerlineH

+. Fhat is the e4pected impact o! cannialiIation o!

e4isting salesH:. Fhat costs will e incurred on a onetime asis onlyH". Fhat are the additional assets and related carrying

costsH0. Fhat is the o$erall impact on the company in terms o!A

a. Pro9t. Eeturn on Salesc. Eeturn on ?ssetsd. Eeturn on =%uity

;. Fhat are the strategic risks and rewardsH/. Fhat should the company do and whyH


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=

W&at i, t&e e>0ecte$ 0#o?t %#om t&e c&a((enge#(ine@


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=2

W&at i, t&e e>0ecte$ im0act o%canni'a(iation o% e>i,ting ,a(e,@


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=)

W&at co,t, i(( 'e incu##e$ on a one-time 'a,i,on(1@

&t is arguale that the 0,### will e di8erential. >he tasks will still e per!ormed y BBCemployees and it is part o! their normal tasks.

>he amount is also insigni9cant.


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=4

W&at a#e t&e a$$itiona( a,,et, an$ #e(ate$ca##1ing co,t,@


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=

W&at i, t&e o+e#a(( im0act on t&e com0an1 inte#m, o%3

a! P#o?t


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=


'! etu#n on Sa(e,

T&e eect i, inc#ea,e in OS o%8<


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=


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=


c! etu#n on A,,et,


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=


$! etu#n on Euit1


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=6

W&at a#e t&e ,t#ategic #i,", an$ #ea#$,@

ISS EWADS

ACCEPT

?dditional competition withchallenger ikes

pportunity to supply todepartment store chain

Loss o! opportunity to enter the

mainstream market using BBCas the rand

Sure order !or : years (+0,###)

despite the poor economy

Current dealers might drop out -se up e4cess capacity toaccommodate 3iValu


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=6

W&at a#e t&e ,t#ategic #i,", an$ #ea#$,@

ISS EWADS

DO NOT ACCEPT

Loss o! additional pro9t Maintain loyal or regular clients

Loss opportunity to enter themainstream market

Jo additional competition

&dle capacity to continue -se idle capacity to make newproducts

Continued decline o! sales o!BBC due to poor economy


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=

W&at ,&ou($ t&e com0an1 $o an$ &1@

Viewing this strictly as a short term decision. BBC should

accept the proposal o! 3iValu due to additional pro9tthat it can achie$e. @ue to the poor economy, it is likelyand more reasonale that the Company should acceptthe o8er.

3owe$er, we should recogniIe sensiti$ity as to otherassumptions that might a8ect this decision in the longrun like i! the 3iValu $olume demand would increasea!ter the three year contract, additional sales losses in

case current dealers drop the BBC line o! icycles and soon.


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Conc(u,ion

?ccepting the proposal o! 3iValu will e good !or the

company as it will pro$ide additional pro9ts !or thecompany in the ne4t : years. >his is a goodopportunity !or the Company to 9nally enter themainstream market or department store chains like

3iValu.


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T&an" You

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Baldwin Bicycle Company PPTFINAL