Essay About Baldwin Bicycles And Significant Increases

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