Baldwin Bicycle Case

Robert, Group Three Consulting has evaluated the proposal from Karl Knott with Hi-Valu regarding the request for Baldwin Bicycle Company to manufacture their Challenger bicycle. As requested, the focus of our analysis centers on relevant costs incurred to manufacture the bicycle as well as the financial impact related to inventory costs. Ms. Leister forwarded on detailed notes taken from her meeting with Mr. Knott regarding Hi-Valu’s proposal, which Group Three Consulting used in the analysis. The proposal deviates from Baldwin’s current strategic position. First, to maintain Hi-Valu’s current profit margin, they have insisted on a selling price lower than their current price sold to distributors. Second, they requested the inventory remain on consignment until the bicycles are shipped from their regional warehouses to stores. Hi-Valu agrees to take any bicycles not shipped within 120 days, and will pay within thirty days. Third, Baldwin must commit to a one year contract.

Relevant Costs to Manufacture the Bicycle

Ms. Leister notified our group that 40% of overhead costs are variable. Since the bicycles represent a product of mixed costs it is important to look into the economies of scale. The relevant costs include materials, labor, and the variable overhead costs, which totals $69.20 per bicycle. Karl Knott suggested a firm price of $92.29 only increasing this price due to inflation. The bicycles could be manufactured on the plants downtime to increase the current capacity of 75%. It is in our opinion that Baldwin re-negotiates the purchase price of $92.29 with additional contingencies in place to account for not only inflation but also increases in raw materials or labor strikes. It will be important to make sure the marginal and variable costs remain the same to allow for economies of scale.

Table 1

Provided by Ms. Leister

Relevant Cost to manufacture

Challenger Baldwin Sales Revenue 10,872,000

Materials 39.8 39.8 Units sold 98,791

Labor 19.6 19.6 Sales Price 110.05

Overhead 24.5 24.5*.40=9.8

Cost Bike 83.9 69.2

purchase price 92.29

Unit Contribution 92.29-69.2= 23.09

Potential Revenue challenger 25000* 23.09=577,250

Working Capital Carrying Costs

Hi-Valu is new to the bicycle industry and has stated that they are unable to accurately forecast potential sales. They have requested that Baldwin keep two month’s supply of materials on hand and 500 bikes ready to be shipped. This will be a significant