BALDWIN BICYCLE COMPANY

JO RDAN JEFFERSO N MITRA

I. Case Facts

 Exist for almost 40 years. Sales were made thro ugh independent stores and bicycle shops.
 Suzanne Leister, marketing vice-president was approached by Mr. Knott Hi-Valu’s buyer of
sporting goods about the possibility of supplying bicycles.

Hi-Valu’s requirements if proposal will be accepted:

 Hi-Valu must have a ready access to a large 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 Baldwin’s 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 Baldwin’s sales volume however this will result to
a higher purchasing, carrying and production cost that has a direct effect to it’s
profitability.

IV. Select Possible Alternative Decisions

 Reject the Proposal / Status Quo

 Accept the Proposal

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V. Evaluation of each alternative choice in quantitative terms

Accept the proposal:

Hi-Valu Selling Price 92.29

Variable Production Cost
Direct Materials 39.80
Direct Labor 19.60
MOH (24.50 * 40%) 9.80 69.20
Unit Contribution Margin 23.09
Multiply by Required Annual Volume 25,000.00
Added Profit 577,250.00

Baldwin Selling Price* 113.38

Variable Production Cost
Direct Materials 39.80
Direct Labor 19.60
MOH (24.50 * 40%) 9.80 69.20
Unit Contribution Margin 44.18
Volume taken from regular customer 3,000.00
Loss Contribution Margin/ Opportunity Cost 132,540.00
*2,827/10,872=26% Full Cost 83.90/.74%

Materials :(25,000/6)*39.80*23% 38,141.67

WIP: 1000 [39.80+1/2(29.40)]*17% 9,265.00
Finished goods: 500*69.20*23% 7,958.00
Added Assets 55,364.67
Finished goods Hi-Valu; (25,000/6)*69.20*13.5% 38,925.00
Hi-Valu Receivables: (25,000/12)*92.29*13.5% 25,956.56 64,881.56
Related Cost
Added Assets and Related Costs 120,246.23

Differential Cost Analysis

Added Profit 577,250.00
Loss Contribution Margin (132,540.00)
Differential Revenue 444,710.00
Added Assets and Related Costs (120,246.23)
Net Added Contribution 324,463.77

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Reject the proposal:

Net Added Contribution becomes an opportunity cost to Baldwin if the proposal turned down.

Differential Cost Analysis

Added Profit 577,250.00
Loss Contribution Margin (132,540.00)
Differential Revenue 444,710.00
Added Assets and Related Costs (120,246.23)
Net Added Contribution 324,463.77

VI. Evaluation of each alternative choice in qualitative terms

Accept the Proposal

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

Accepting
the Proposal
3. Good market condition of Hi-
Valu may equate the weak
market condition of Baldwin.
4. Expansion due to additional
market segment.
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.

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Reject the Proposal:

PROS: CONS:
1. Preserved established 1. Decrease in sales resulted
relationships with the from poor economy.
dealers.

Reject the
Proposal

2. Divert it's attention to

focus on quality 2. Increase in production
improvement of the cost due to idle capacity.
products.

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-

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