Baldwin Bicycle

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Ramon V. Del Rosario College of Business

In Partial Fulfillment of the Course Requirement

For Management Accounting

Term 1, A.Y. 2017-2018

ACC535M

BALDWIN BICYCLE COMPANY

Case Analysis

Submitted By:

Cruz, Carlo

Lao, Cherry

Ramirez, Elvin Joseph

Sy, Leslie

1. SYNTHESIS

Suzanne Leister, the marketing VP of Baldwin Bicycle Company is thinking over the business opportunity that lies ahead with Hi-Valu Stores, Inc. Hi-Valu is a well-known chain of department store in which volume had grown to the extent that it was beginning to add “house-brand” merchandise to the product lines of its departments. Mr. Knott, Hi-Valu’s buyer for sporting goods approached Ms. Leister about the possibility of producing bicycles with a brand “Challenger” for them.

Most of Baldwin’s sales were through independently owned toy stores and bicycle shops. They had never before distributed their products through department store chains of any type. Hi-Valu’s proposal had features that is quite different from Baldwin’s normal way of doing business. Once accepted, Hi-Valu would sign a contract guaranteeing that it would buy its house-brand bicycles only from Baldwin for a three-year period, then extend on year-to-year basis. Ms. Leister realized that she needed to do some financial analysis before having further discussions with Karl Knott of Hi-Valu.

1. POINT OF VIEW:

The group will take the point of view of Suzanne Leister who is the key person of Baldwin Bicycle Company to analyze the proposal and negotiate with Hi-Valu Stores, Inc.

1. STATEMENT OF THE PROBLEM

What should be the decision of Baldwin Bicycle Company considering the possible impact of accepting Hi-Valu’s business proposal on its existing market?

1. OBJECTIVES:

1. To come up with the best decision on whether or not to proceed with doing business with Hi-Valu.
2. Calculate the effect on the company’s overall sales and profits.
3. Take into consideration the possible effect on its existing market.
4. Take into consideration the company’s future growth and expansion.

1. AREAS OF CONSIDERATION:

1. High-Valu needs ready access to a large inventory of bicycles because it cannot predict the monthly bicycle sales by store. It is willing to carry the inventories in its regional warehouses but did not want the title on a bicycle to pass from Baldwin to Hi-Valu until the stocks are shipped to a specific store.
2. Once shipped to a specific store, the stocks will be paid within 30 days.
3. Hi-Valu agrees to take title to stocks that had been in any of its warehouses for 4 months, stocks will be paid within 30 days. It is estimated though that on average, a bike would remain in Hi-Valu regional warehouse for 2 months.
4. Hi-Valu wanted to sell its Challenger bicycles at lower prices than other name brand bicycles it carried, yet still earn approximately the same gross margin. Thus, Hi-Valu wanted to purchase bikes from Baldwin’s at lower prices than the wholesale prices sold through its usual channels.
5. Hi-Valu wanted the Challenger bike to be different in appearance from Baldwin’s other bikes. Which would increase Baldwin’s purchasing, inventorying and production costs.
6. Baldwin’s sales volume has been going down for the past 2 years, it is currently operating at about 75% of its one-shift capacity.
7. The estimated first-year cost of producing Challenger Bicycles is as follows:

$39.80                Materials specific to Challenger

$19.60                Labor

$24.50                Overhead, 40% of which is variable

1. One time cost of preparing drawings and arranging sources of materials for Challenger totals to $5000.
2. Asset related cost counted as annual variable cost as percent of dollar value of assets

11.5%        Pretax cost of funds (to finance receivables or inventories)