Baldwin Bicycle Company: Background of the Study

BA-561 MAC Abdulgaffur G. Deki Oscar M. Inocencio Chester V. Lagutin Felomena C. Baal Edsel Cariz J. Tiu 12 October 2012 â€Å"Baldwin Bicycle Company† Background of the Study: Baldwin Bicycle Company (BBC) is a full-line bicycle manufacturing company with 40 years of experience. In 1982, BBC has revenue of over $10M for 98,791 units produced. BBC exclusively distributes through independently-owned retailers, their bicycles are known for their above-average quality. In May 1983, a rapid-growing Northwestern discount retail chain, Hi-Valu, Suzanne Leister, VP Marketing, proposed a private-label agreement.Under this program, BBC would manufacture the Challenger line of bicycles exclusively for Hi-Valu. The Challenger line was to be a low-priced value bicycle, sold at retail prices under BBC’s normal product lines. Statement of the problem: What is the overall impact to the company if BBC will accept the proposal in terms of? a. ) PROFIT b. ) RETURN ON SALES c. ) RETURN ON ASSETS d. ) RETURN ON EQUITY Objectives: 1. To be able to show and analyze the proposal depending on the result which will be used to serve as a basis for making decisions. 2.To determine the total relevant cost in producing additional orders for Hi-Valu. Areas of consideration: 1. BBC sales over the next three years would be 100,000 bikes a year if they will forego the Hi-Valu deal. 2. If BBC will accept the offer, 3,000 units will be lost in regular sales volume a year. 3. According to Ms Leister, Vice President for Marketing, she was acutely aware that the â€Å"bicycle boom† had fattened out, and that poor economy had caused Baldwin sales volume to fall. 4. BBC was currently operating its plant at about 75% of capacity meaning, 75,000 units is currently produced. excess capacity 25,000 units) 5. The contract between BBC and Hi-Valu is for three years and will be automatically extended on a year to year basis, unless one party gave notice that it did not wish to extend th e contract. 6. Most of BBC sales were into independently toy stores and bicycles shops, BBC had never before distributed to its product to department store. Its BBC’s first time to deal such client. 7. Hi-Valu wanted to purchase bikes from BBC at lower prices that the wholesale prices of comparable bikes sold through Baldwin usual channels. 8.If the proposal will pursue BBC requirement for purchasing, inventory and production cost will increased. 9. Hi-Valu would hold the units on consignment in its own warehouses and withhold payment until delivery to a specific store. 10. A bicycle would be paid within 30 days once a bicycle was shipped to a specific store or 120 days had elapsed in the regional warehouse. Alternative courses of action: 1. Reject proposal RISKS: a. ) BBC may face continually declining sales due to a poor economy. b. ) BBC will continue to produce at only 75% production capacity. c. Another disadvantage is that the offer price of Hi-Valu was lower than the r egular selling price. d. ) There is an additional cost involved in producing additional units from Hi-Valu the $5,000 additional cost plus the asset related cost. e. ) The possibility that the current dealers of BBC might drop-out line if they find that BBC is making bikes for Hi-Valu. f. ) The freight charge will be shouldered by BBC until it reached the destination of Hi-Valu warehouse. g. ) additional from regular sales of 3,000 units from regular costumers. ADVANTAGES: a. ) Maintain loyalty from current distributors . ) Maintain 40-year reputation for above average quality and price. 2. Accept Proposal RISKS: a. ) Current dealers may drop Baldwin line. b. ) Current dealers may request a similar product c. ) Putting faith in a new product d. ) BBC may find itself with an abundance of Challenger-specific inventory e. ) Extra costs may result in having to use cheaper materials f. ) Loss of â€Å"street cred† ADVANTAGES: a. ) Greater penetration of the mark through new market segments b. ) I f Baldwin name is not on the Challenger bike, BBC’s reputation may not be damaged c. Strong Challenger sales may balance weak Baldwin sales d. ) With Challenger line, BBC will be producing at a higher capacity Recommendation: The group recommends the alternative courses of action number two which state Accept the Proposal. The followi ng computations was the basis of the recommendation. Potential Problem Analysis: 1. Additional cost is involved. 2. Lost additional sales from the costumers 3. Additional investment to finance additional increase in receivables, inventories, record-keeping,tax inventory, handling labor and equipment, possible obsolescence and or damage.