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
Units sold
98,791
Labor
Sales Price
110.05
Overhead
24.5*.40=9.8
Cost Bike
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