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ic yc le C as e

Baldw i n B

Facilitator’s :
Suman (02)
Suraj(16)
Sunanda(32)
Shivraj(60)
Sunaina(11)
Shrikant (23)
Q.1 ) What are the important features of
this case?
• BBC is a mid-range full-line bicycle manufacturing
company.
• It distributed exclusively through independently-owned
retailers & speciality bicycle shops.
• Hi-Valu was a discount department store.
• Hi-Valu had proposed a private-label agreement.
• Result in cannibalization of an estimated 3000 units.
• Terms of the proposal deviated from the standard practice.
• Relevant Cost Analysis revealed that Challenger deal could be
lucrative source of incremental revenue
Q.2) Bring out the data pertinent to Hi-Valu
proposal?
Data pertinent to Hi-Valu proposal
1. Estimated first-year costs of producing Challenger bicycles (average unit costs)
a. Materials……………………………………… $39.80
b. Labor…………………………………………... $19.60
c. Overhead ( @125% of labor)………………… $24.50
$83.90 (approx.. $84)
2. Unit price and annual volume.
Hi-Valu estimates that it will need 25,000 bikes a year & proposes to pay an average of $92.29
per bike for the first year)….[ price will increase in proportion to inflation-specified in contract
containing inflation escalation clause].
3. Asset related costs (annual variable cost)
a. Pretax cost of funds (to finance receivables/inventories)…………...18.0%
b. Record keeping costs (for receivables/inventories)………………......1.0
c. Inventory insurance……………………………………………….. ..0.3
d. State property tax on inventory……………………………………...0.7
e. Inventory handling labor and equipment…………………………...3.0
f. Pilferage, Obsolescence, breakage, etc………………………………0.5
4. Assumptions for Challenger-related added inventories.

a. Materials: Two months supply

b. WIP: 1,000 bikes, half completed (but all materials for them issued)

c. Finished goods: 500 bikes (awaiting to get into Hi-Valu’s warehouse).

5. Impact on regular sales: Some customers compare the bikes and may recognize
Challenger bike as a good value bike when compared with other bike’s. In 1982,
Baldwin sold approx. 99,000 bikes.
a. It will sell 1,00,000 bikes if it do not accept the proposal.

b. If it accepts the proposal, Baldwin will lose about 3,000 units per year.
Q. 3) Relevant Cost analysis of Hi-Valu offer?
Marginal Revenue     $92.29
Less: Variable cost      
  Materials $39.80  
  Labor $19.60  
  Overhead $9.80  
  Total Variable cost   $69.20
Unit contribution     $23.09
Contribution for 25,000 units     $5,77,250

Less: Erosion of 3,000 units:      

Revenues   $110.05  
  Average Unit cost $71.67  
  Lost CM $30.39  
Net revenue erosion     $1,15,155.16
One-time set up cost     $5000
Net relevant cost     $ 457,094.84
Q.4) Discuss the managerial accounting theme
reinforced in this case?

• Cost behavior analysis


• Profit contribution analysis
• Long-run versus short-run product and customer profitability
• Inventory and receivables carrying cost
• Working capital management
• Project return on investment( ROA versus residual income)
• Balancing quantitative and qualitative issues in a decission.
Q.5) Strategic analysis of Hi-Valu offer?

HI- VALU’s positioning of


‘CHALLENGER’ bicycles:

VALUE LOW PRICE


BIKE BIKE

LOW PRICE &


MIDQUALITY BIKE
STRATEGICAL ANALYSIS (Contd)

 NO CLEAR COMPETITIVE
ADVANTAGE:

Manufacturi
ng efficiency No ‘top-of-the-
is low line’ product

No
patentable
technology
or process
Q.6) What is the learning from this case?

• How an explicit cost analysis would help the firm to


understand the relative attractiveness of the strategic
alternatives.
• The financial aspects of the firm and how would the same get
affected by external forces.
• A clear portrait of the existing and expected threats to a firm
• A profitable decision could be created
an k you
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