BALDWIN BICYCLE COMPANY

JORDAN JEFFERSON MITRA

I. Case Facts
Exist for almost 40 years. Sales were made through independent stores and bicycle shops.
Suzanne Leister, marketing vice-president was approached by Mr. Knott Hi-Valus buyer of
sporting goods about the possibility of supplying bicycles.

Hi-Valus requirements if proposal will be accepted:

Hi-Valu must have a ready access to a lar ge inventory of bicycles due to unpredictable
volume of sales.

Hi-Valu wanted to purchase the bicycles from Baldwin at a lower prices compared from the
wholesale prices of the same bikes sold in the usual markets
Hi-Valu wanted the challenger bike to be somewhat different in appearance from Baldwins other
bikes.

If agreement could be reached on prices, Hi-Valu would sign an exclusive contract with Baldwin
for three years. The contract is renewable unless either of the party express his will to
discontinue.

II. Objective of the Case

To come up with a short-run alternative choice of decisions.
To analyze the cost behavior and its impact.
To apply differential cost accounting in selecting a good choice.
Limitations and Constraints:
All variable cost are differential and primarily used in the decision analysis.

III. Define the Problem

The proposal of Hi-Valu will increase Baldwins sales volume however this will result to
a higher purchasing, carrying and production cost that has a direct effect to its
profitability.
IV. Select Possible Alternative Decisions
Reject the Proposal / Status Quo
Accept the Proposal
V. Evaluation of each alternative choice in quantitative terms
Baldwin Bicycle Company Case

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Accept the proposal:

Hi-Valu Selling Price
Variable Production Cost
Direct Materials
Direct Labor
MOH (24.50 * 40%)
Unit Contribution Margin
Multiply by Required Annual Volume
Added Profit

92.29
39.80
19.60
9.80

Baldwin Selling Price*

Variable Production Cost
Direct Materials
39.80
Direct Labor
19.60
MOH (24.50 * 40%)
9.80
Unit Contribution Margin
Volume taken from regular customer
Loss Contribution Margin/ Opportunity Cost

69.20
23.09
25,000.00
577,250.00
113.38

69.20
44.18
3,000.00
132,540.00

*2,827/10,872=26% Full Cost 83.90/.74%

Materials :(25,000/6)*39.80*23%
WIP: 1000 [39.80+1/2(29.40)]*17%
Finished goods: 500*69.20*23%
Added Assets
Finished goods Hi-Valu; (25,000/6)*69.20*13.5%
Hi-Valu Receivables: (25,000/12)*92.29*13.5%
Related Cost
Added Assets and Related Costs

Differential Cost Analysis

Added Profit
Loss Contribution Margin
Differential Revenue
Added Assets and Related Costs
Net Added Contribution

Reject the proposal:

Baldwin Bicycle Company Case

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38,141.67
9,265.00
7,958.00
55,364.67
38,925.00
25,956.56

64,881.56
120,246.23

577,250.00
(132,540.00)
444,710.00
(120,246.23)
324,463.77

Net Added Contribution becomes an opportunity cost to Baldwin if the proposal turned down.
Differential Cost Analysis
Added Profit
Loss Contribution Margin
Differential Revenue
Added Assets and Related Costs
Net Added Contribution

577,250.00
(132,540.00)
444,710.00
(120,246.23)
324,463.77

VI. Evaluation of each alternative choice in qualitative terms

Accept the Proposal

CONS:
1. Hi-Valu product specifications
entails higher production cost,
purchasing cost and inventorying cost.
2. Opportunity costs due to loss sales
from regular customers.

PROS:
1. Higher capacity utilization may
result to higher potential profits.
2. Eliminates exposure to risk
caused by the poor economy.

Accepting
the Proposal

Baldwin Bicycle Company Case

3. Cash flows issues while cash coming

in may be too slow to cover subsequent
production runs.
4. Current distribution channels may
drop its line and move to Challenger.

3. Good market condition of HiValu may equate the weak

market condition of Baldwin.
4. Expansion due to additional
market segment.

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Reject the Proposal:

CONS:
1. Decrease in sales resulted
from poor economy.

1. Preserved established
relationships with the
dealers.
PROS:

Reject the
Proposal
2. Divert it's attention to
focus on quality
improvement of the
products.

2. Increase in production
cost due to idle capacity.

VII. Conclusion
Accept the proposal because of its interesting net added contribution that may yield
return to Baldwin Bicycle Company.

VIII. Other Matters

There will be no ethical issues unless both parties will be binded by stipulation about
specific parties. However, the case is silent about the manner of inventory title passage
but I assume that another stipulation will be made by both parties stating the procedures
and terms of payment.

-God Bless-

Baldwin Bicycle Company Case

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