From: Rachel Schmieding
Re: Cliff Jumper
Date: January 31, 2011
There are many aspects that Cliff Jumper needs to consider when deciding whether or not to accept Hi-Valu's proposition about making a low priced bike. Not only has the demand for bicycles flattened, but also Cliff Jumper's sales volume. Hi-Valu is proposing that Cliff jumper should make a low priced bike for their chain retail stores. Cliff Jumper believes that they are a high quality bike, and the making of this type of bike may ruin that image. However, they need added sales. On one hand, Hi-Valu believes that they will be selling about 24,000 bikes a year. On the other hand, if they choose to accept this proposal, they will be taking on added costs for the new product, including the design of the new bike, more materials, and Hi-Valu is requiring that they pay for storage of the product for at least a month.
As of the end of 1998, Cliff Jumper was making profits. However, the profit that they received after all the costs were taken out of their sales was only $300,000. This means that they only have a profit margin of 2.7% of sales. This is not stable enough and far too slim for comfort. Also, the company's COGS is 78% of sales, only allowing 22% to cover any other costs, such as tax and SGA costs. These costs are already 19% of sales. If they increase at all, this company may not be able to cover, which may lead to a loss for the year.
To be able to figure out if this is a good deal for Cliff Jumper or not, we must look at the potential profits in making the Challenger bike for Hi-Valu. This includes knowing the potential sales, variable costs, and fixed costs along with financing options. Let’s take a look at the income statement for the potential sales of the Challenger:
Components and Materials (24K*$40)960,000
Assembly Labor (24K*$20)480,000