Clermont Cycle Company Harvard Case Solution & Analysis

Clermont Cycle Company Case Study Solution

Incremental after-tax earnings from Lightning Bolt:

It can be said that Lightning Bolt is financially feasible for Clermont Cycle Company because of the positive net income. Total revenue from the Lightning Bolt project is $3 million based on the forecasted sales demand of the product and expected value of the additional demand. Total material labor and variable manufacturing overheads are $1.393m, $0.635m and $0.291 million. The gross profit is almost $0.68 million. Although the net income from the project is positive, it is possible that the project might fail to improve the profitability position of the company because of high fix costs. The net incremental income from the project after deducting all the relevant cash flows will be $252,431.

Aspects of Concern:

There is much concern existing in the Big Smart’s offer which should have to be resolved before entering into the contract, failure to address the concerns can cause substantial losses for Clermont Cycle Company. Following issues exist in the Big Smart’s offer:

The main concern in the Big Smart’s offer is the lower selling price of the cycles, although Big Smart will purchase cycles in bulk, the profit figures would be too low even if Bog Smart buys cycles in bulk.

The second issue which is causing concern is the additional requirements of Big Smart; Big Smart wants lightning bolt name to be embossed in the cycle along with the name of Big Smart which will cost $4 per unit additional to Clermont. This additional procedure is further reducing the profits of Clermont.

The third issue that pertains with the Big Smart offer is the insufficient demand; there is little probability that Big Smart will require additional units which are decreasing the attractiveness of the project for Clermont Cycle. However, it can be said that the intensity of this issue is not as high as of previous issues because of the fact that there are chances that the demand could increase in coming years if Lightning Bolt becomes successful.

Strategic Risk:

The Lightning Bolt project seems to be risky; there are many factors which indicates that the project is of high business risk. Firstly, Big Smart have not guaranteed minimal sales to Clermont; it can be possible that Big Smart does not order cycles in pre-defined quantity because of poor demand. Although, it is an inherent limitation of business the risk should have to be shared by both the parties.Currently, this risk is shared by just Clermont because Clermont will have to face all the negative consequences of the poor demand. Furthermore, the holding costs are also higher which represents the profitability and liquidity risk, as Big Smart will not take ownership of the cycles until they are shipped to their warehouse, all the holding costs will have to bear by Clermont. As the holding period is higher, the likelihood of inventory being damaged will also be higher because of the direct relationship between these two variables.Lastly, Clermont will also lose some of its clients because of the contract with Big Smart, the customer might find Lightning Bolt attractive, and they will directly purchase the cycle from Big Smart, thus reducing the potential revenue of Clermont.

Strategic Rewards:

Apart from the risk associated with the project, there are many rewards of the project as well. The main reward that Clermont will get is that the number of units sold will be increased, Clermont cannot sell the particular model that Big Smart can sell. Furthermore, the brand recognition is also increased if Clermont sells its cycles at the stores of Big Smart. Moreover, Clermont will also be able to assess the trends in the market if it enters into the contract with Big Smart, Clermont can easily understand the demand pattern of the new products if it enters into the contract with the Big Smart. Lastly, Clermont can also evaluate the potential favorable changes in the cycles, manufacturing bespoke cycles for Big Smart will also enable to assess which innovative features have higher demands and which have fewer demands. This will benefit Clermont in future when they are launching their product similar to the lightning bolt........................

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