Baldwin Bicycle Company Harvard Case Solution & Analysis

Baldwin Bicycle Company Case Study Solution

Facts

Baldwin Bicycle Company manufactures bicycles from the last 40 years. It manufactures bicycles of 10 models ranging from small beginners to adult deluxe bicycle. Currently, the company sells its products to independent toy stores and bicycle shops.In 1989, Karl Kroll a buyer from Hi-Valu Stores Inc. approached the company.

Hi-Valu operate in a chain of discount department stores and needs a high volume of bicycles. Therefore,they proposed an offer to Baldwin Bicycles to produce bicycles for them. In their proposal they included many terms like the company need a high volume of bicycles, the cycles should bear the Challenger name instead for the current brand name, the cycles should be sold at lower price than the current wholesale price of Baldwin and some other term relating to the payment.Along with this Hi-Valu also want that the bicycles should look different from the current Baldwin Bikes for this purpose,Kroll intends that the company should change the fenders, handlebars, seats, and tire of the bicycle.Moreover, they want that these bicycles should be packed in boxes so that they look different from Baldwin Bikes.

Suzanne Leister, marketing vice president of Baldwin Bicycles needs to know that either the proposal is beneficial for the company or not. Furthermore, if Baldwin accepts the proposal then it has to cannibalize some of its sales hence Leister wants to know the effect of this cannibalization. Moreover,she intends to know the one-off cost which will be incurred in fulfilling this proposal. Along with this,she also wants to know the additional assets, their carrying cost and financial effect of the proposal on the entire company.

Analysis

If Suzanne Leister accepts Kral Knott’s proposal of delivering challenge line bikes, then from this proposal Baldwin Bicycle Company will earn a profit of approximately $83480.

But for accepting this proposal company has to cannibalize its existing sales volume by 3000, this cannibalization will reduce the net income of the company by approximately $1500.But if we incorporate the income generated from Hi-Valu then the total income which will be earned by the company after the cannibalization will be approximately $334000. As it is 32.53% greater than the traditional method, therefore, we can say that cannibalization will have a positive impact on the profitability of the company.

Hi-Valu demanded a different type of seats, fenders, and handlebars.They also needed tires with the name‘challengers’ on them.Moreover, they also wanted that the bicycles should be packed in boxes. Baldwin Bicycles has to spend approximately $5000 cost to arrange the sources for seats, fenders, handlebars, tires, and boxes, therefore, this cost is considered as one-time cost.

Hi-Valu estimated demand is approximately 25000 bikes while material used to manufacture the bikes is provided by the supplier in approximately 2 months therefore, company needs to manage the material so that it can fulfill the demand of Hi-Value. Further more, as Hi-Valu pays the outstanding amount in 30 days, therefore, this will also increase the receivables by approximately $192271.Along with this the value of work in progress and finished goods is approximately $125850. Therefore, we can conclude that in result of accepting this proposal the assets will be increased by approximately $483954 and the carrying cost of these assets will be increased by $54902.

Before accepting the proposal gross profit, net profit, return on sales, return on assets and return on equity are approximately 26%, 2.35%, 4.35%, 3.15% and 8.22% while after accepting Kroll’s proposal they become 23%, 2.57%, 4.77%, 0.99% and 10.76%. The gross profit will decrease slightly while the return on assets will decrease significantly however other ratios will be improved. Hence we can conclude that the overall impact over the ratios will be positive.

Baldwin Bicycle Company Harvard Case Solution & Analysis

 

 

Conclusion and Recommendation

After accepting this proposal there will be a decrease in the customer base of Baldwin Bicycles.There is also a risk that some other customer may refuse to buy bikes from the company if they know that company is selling bikes to Hi-Valu, therefore, this can further jeopardize the position of the company. But if company accepts this proposal then it will enter into another market hence company can diversify itself after accepting this proposal which will also reduce the overall risk of the company and also strengthen the position (profitability) of the company.(Craig, 2015)

After analyzing the financial results and strategic rewards and risks we will recommend that Baldwin Bicycles should accept this proposal. But before accepting the proposal company should renegotiate some of the terms of the contract like the demand for special tires as this will increase the overall cost of the bikes, therefore, the company should try to shift this cost to its buyer so that it can save itself from adverse consequences. Furthermore, in the current contract, the payment term is too broad this may create problems of working capital for the company, therefore, it should also renegotiate this term so that it can save itself from any possible issues........................

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