Bbc Case Study

Topics: Revenue, Management accounting, Balance sheet Pages: 4 (961 words) Published: February 18, 2013
Problem Statement: There is unused capacity due to the flattening of the “bicycle boom” and a poor economy. Baldwin Bicycle Company (BBC) must decide how to best utilize the available capacity and determine if taking Hi-Valu’s proposed contract would be the optimal solution. Quantitative Analysis:

* By accepting the offer, BBC will increase their contribution margin by $442,290 (Exhibit 1). Although there is a loss of contribution margin equal to 3000 units of BBC’s products, the additional contribution margin from Hi-Valu’s proposition more than offsets the loss. * Upon accepting the offer, BBC will need $735,530 per year to invest in additional assets (Exhibit 2). BBC does not currently have enough cash to pay for the first year’s additional capital expenditure; they will need to attempt to obtain a loan or financing. * Exhibit 3 displays the 2011 BBC income statement assuming BBC accepts Hi-Valu’s proposal and the company only suffers a 3000 unit loss. * The debt-to-equity ratio of 1.6 shows that this is a highly leveraged firm. BBC may not be able to generate enough cash to cover its debt obligations (Exhibit 4). Thus, the company will have search for creditors willing to invest; this may be difficult as creditors may be uncomfortable with the fairly high debt-to-equity ratio. * The inventory turnover ratio for BBC is 2.92; inventory is expected to sell less than 3 times a year. Qualitative Analysis:

* BBC must investigate to verify that they have the manufacturing capabilities to handle the uncertain demand from a large chain store like Hi-Valu. Hi-Value has had great difficulty predicting sales both by store and by month; BBC must be prepared * Assuming workers are efficient at 75% capacity, more employees will be needed to produce the Hi-Valu order. Training expenses and additional wages should be considered. * The contract does not align with BBC’s current practice and strategy. Although BBC’s bikes are not “top of the line”,...
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