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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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Data Pe#tinent to .i-/a(uP#o0o,a(
• 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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Data Pe#tinent to .i-/a(uP#o0o,a(
• ?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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Data Pe#tinent to .i-/a(uP#o0o,a(
• ?ssumptions !or Challengerrelated addedin$entories (a$erage o$er the year)A•
MaterialsA two months* supply• Fork in processA ',### ikes, hal! completed
(ut all materials !or them issued)• Ginished goodsA 0## ikes (awaiting ne4t
carload lot shipment to a 3iValu warehouse)• Payment o! 3iValu*s payales will e within a
month
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Data Pe#tinent to .i-/a(uP#o0o,a(
&mpact on BBC*s regular salesAa. &n ', BBC sold ,/' ikes
. Ms. Leister*s est guess is that sales o$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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=
W&at i, t&e o+e#a(( im0act on t&e com0an1 inte#m, o%3
'! etu#n on Sa(e,
T&e eect i, inc#ea,e in OS o%8<
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=
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=
W&at i, t&e o+e#a(( im0act on t&e com0an1 inte#m, o%3
c! etu#n on A,,et,
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=
W&at i, t&e o+e#a(( im0act on t&e com0an1 inte#m, o%3
$! etu#n on Euit1
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=6
W&at a#e t&e ,t#ategic #i,", an$ #ea#$,@
ISS EWADS
ACCEPT
?dditional competition withchallenger ikes
pportunity to supply todepartment store chain
Loss o! opportunity to enter the
mainstream market using BBCas the rand
Sure order !or : years (+0,###)
despite the poor economy
Current dealers might drop out -se up e4cess capacity toaccommodate 3iValu
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W&at a#e t&e ,t#ategic #i,", an$ #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