Baldwin Bicycles

Baldwin Bicycles

Problem Definition

Immediate issue/s

Should Baldwin accept Hi-Valu’s proposal or not

Strategic issue/s

Terms of proposal deviate from standard practice

Large capital outlay required to finance agreement

Challenger bikes will be sold at lower than normal distributor prices

Current Insights

Company Analysis

Declining sales due to poor industry

Capital Requirements

Significant increases in working capital to finance proposal

High debt levels

Inventory levels are high

Operating at 98,791 in 1982 (25% below annual capacity of 130,000+ units)

No real strategy - taking deal will change how they operate

Industry Analysis

Declining industry/economy affecting sales of company

Hi-Valu strong bargaining power

Seasonal product

Overseas manufacturing (foreign competition)

Competition (mid-range and low-range bikes)

Hi-Valu Proposition

Requires 25,000 units per year (brings production up to capacity)

Payment withheld until delivery to specific store

Bicycle paid for within 30 days once shipped to store OR when 120 days elapsed in regional warehouse

Hi-Valu pays $92.29 per unit (less than wholesale price of equivalent model) to preserve their own margins

Calculations

Accept Proposal

Added Profit

Selling Price: $92.29

Variable Production Cost: $69.20

Contribution Margin: $23.09

Required Annual Volume: 25,000 units

Added Profit: 577,250

Opportunity Cost

Normal Selling Price (Assuming Sales Levels Consistent): 10,872,000 / 98,791 = $110.05

Variable Production Cost: $69.20

Contribution Margin: $40.85