Coll College of Business and Economics
Ramon V. Del Rosario Sr. Graduate School of Business
Baldwin Bicycle Company
Submitted in partial fulfillment
For the requirements in
Management Accounting (ACC510M)
AY 2010-2011, 3rd Trimester
Professor Jolly B. Cruz
Presenting Group 5
Kelvin L. Go
Elmer V. Dela Cruz
Joshua G. Soriano
Jeffrey T. Tabangcura
Kristian Jewel P. Taiño
26 February 2011
Baldwin Bicycle Company (BBC) is a mid-range full-line bicycle manufacturing company with 40 years’ experience. BBC produced 98,791 units accounting for over $10MM in revenues in 1982, with an expected 100,000 units for the next three years. Distributed exclusively through independently-owned retailers and specialty bicycle shops, BBC bicycles are known for their above-average quality. In May 1983, a rapidly-growing Northwestern discount retail chain, Hi-Valu, approached Suzanne Leister, VP Marketing, and proposed a private-label agreement.
Under this new program, BBC would manufacture the Challenger™ line of bicycles exclusively for Hi-Valu. The Challenger line was to be a low-cost value bicycle, sold at retail prices under BBC’s normal product lines. This would result in expected cannibalization of an estimated 3,000 units but incremental sales of 25,000 units.
The terms of this proposal, however, deviate from standard practice. Hi-Valu insists that the bicycles be sold to them at a price lower than BBC’s normal distributor prices to preserve Hi-Valu’s margins. Further, bicycles would be shipped to Hi-Valu’s regional warehouses on consignment and paid only when 120 days had elapsed or the bicycle was shipped to a Hi-Valu store, whichever occurred first. Payment would then be Net 30 days.
Relevant cost analysis revealed that the Challenger deal could be a lucrative source of incremental revenues, since the 25,000 additional units could be produced during plant slack time; however, as a discount value line, the Challenger program does not align strategically with BBC’s best-cost provider strategy. Further, the initial capital outlay of $787,000 for the project exceeds BBC’s available resources.
Statement of the Problem
▪ Should BBC accept Hi-Valu’s offer?
Objectives of the Case
▪ To find ways on how to impede decreasing sales volume of BBC without compromising the way it does business
▪ To find ways on how to continue producing existing product line – may not be the exact model but at least bearing the make and image of BBC bicycles (not top of the line but above average in quality and price)
Theoretical Framework: Chapter 26 Short-Run Alternative Choice Decisions
§ Alternative Choice Problem
▪ Two or more alternative choices of action are specified, and the manager chooses one that he or she believes to be the best
o Accepting the proposal of Hi-Valu or rejecting it and just continue with existing business
§ Opportunity Cost
▪ A measure of the value that is lost or sacrificed when the choice of one course of action requires giving up an alternative course of action
o If Hi-Valu’s proposal is accepted, this would mean that BBC will have to adhere to the product specifications and inventory requirements of Hi-Valu – some existing materials used for BBC bicycles (specifically for the fender, seat, handlebar, tire and packaging) will no longer be used
§ Sunk cost
▪ Cost that has already been incurred and therefore cannot be changed by any decision currently being considered
o The cost of the machines to be used to make the materials or assemble them has already been incurred whether or not BBC accepts Hi-Valu’s proposal.
Areas for Consideration
▪ Hi-Valu would hold the units on consignment in its own warehouses and withhold...