Ch.apter 26 Short-Run A{temotiye,Chaice Decisio4s.

859

tsaldwin Bicycte Company*

fu \f ar' 1989 Suzalne Leister, marketing vicepresident whsels to a deluxe l2-speed adult's model: Sales were
mr gaidwin Bicycle Company, was mulling oyer the cur:rently at an annual rate of about $10 million. (The
dscussion she had had the previous day with Karl company's 1988 financial statements appear in Ex-
[.r:rrn. 3 buyer from Hi-Valu Stores, lnc. Hi-Valu oper- hibit 1.) Most of Baldwin's sales were through inde-
m.-d a chain oldiscount department stores in the Norlh- pendently owned toy stores and tricycle shops. Bald-
we=t- Hi-Valu's sales volume had grown to the extent win had neyer before distributed its products through
dni: it u.as beginning to add "house-brand" (also called department store chains of any type. Ms. Leister felt
*:r:', ate-label") merchandise to the product
lines of that Baldwin bicycles had the image of being above
ire,eral of its departments. Mr. Knott, Hi-\,hlu's buyer ayerage in quality and price, bui not a "top ofthe line"
tflm sporting goods, had approached Ms. Leister about product.
fre prossibility of Baldwin's producing bicycles for Hi- Hi-rrhlu's proposal to Baldwin had features that
tTlu- The bicycles would bear the name "Cha11enger." made it quite different from Baldwin's normal way of
,mi:,-h Hi-Valu planned to use for a1l of its house-brand doing business. First, it was very important to Hi-Valu
,ft)rting goods. to have ready access to a large inventory ofbicycles,
Baldrvin had been making bicycles for almost 40 because Hi-Valu had had great difficulty in predicting
i,ears. In 1989 the company's line included l0 models, bicycle sales, both by store and by month. Hi-Valu
ruging from a small beginner's model with kaining wanted to carry these inventories in its regional ware-
houses, but did not want title on a bicycle to pass from
Baldwin to Hi-\hlu until the bicycle was shipped from
- i:pyright O Professor Robert N. Anthony. one of its regional warehousss to a speclfic Hi-Valu

EXHIBIT 1 Financial Statements (thousands of dollars)

Aiseti Liabilities and Owhertl, Equit,

Cash $ 342 Current liabilities $3i4,78
Ac(ounts receivable 1,359 Noncurrent liabi!i!iq1
lnventories 2!756 Total liabilities, , , r,,,41,990
Plant and equipment (net) '3,635 u^wnersl eqilityr i. ir l
,'3;1:02
q8,q92
@E

Sales revenues , .
s_1ro,8,72
Cost of sales i8;045
Cross margin
.2i18;27
Other expenses 2;354
lncome before taxes 473
lncome tax expense 218
Net income $ 2ss
 860 Part2 ManagententAccounting

EXHIBIT 2 Data pertinent to l&yalu proposar Notes

taken by suzanne Leister

t.$lgg;111ryir46;rs;

Mdterials".-,.: r, I ]:,lr'r::tl lr,r.:.'.

Dif€et lab*r r,,,'t .,:',,.,,,.,', .,- $39.80r

(e I9'60,'
Over,head, i.ZS% oi; dirg Jabo$
.21,5Q,
$83.9or
i Inclr4esitenx speiiftrtn*a"iifstn'!'.yallr,roios**ir+uriraadardmodeis.
*
Accountant says about 40 Dercenr,of ., .

rolal production or mhcad

ofDL$ rare is based on rolumc of ,, r *,r0,", l25 pucenr
100.000 bi.y"l., p*"r"rr. "" """,
"L,

';'"ild$'fi#l&[:l"1lTtrlifrj[*;::,H#*llilp:[:*r,;,,pp,n"i,,1,,",,'ij.ooorbased
on
3' unit price ond onnuatv elrrtitii*;lti@res ilwirl,nieJ)i,ooo.q1y
1' r:
"'I {bas d n the assurneo.mxor*J'l#inir*13q* * g.szzs.pii6ke ayear,and p:oposes ro pay us
a{li'inflation esEalarion clause for rhe {irst y*a" bonrr.t
such lriiiiri.. ro conra&r
:..,:r eestlrshowrr initem yrr i"1,1gi!"1"-;fi#;", ,o inflatio;caused
,..-'.1'IX[I-Knott
1, abovel thq!, t" isz?s,.unA Sa:.go i,niiJ. rr*, ,,
effect, 1so35tant_dolla/,
increases in

lntirngted thattuie,was]very rittre,,i{ ;d.;;rns reuwuy i*,rr*'!g},io proposed

t!y, ini
',,4;, asset:doted iosts (annuarvariable
..: ::: . ., ., .
coitsrlusapql.ent of dor.tar value
assets)l
of
,,pret!{co$tsffundsitofinancerqeqiyab,lesor,inventones)
,

. ,
:. .. .:. ::: :.: Recordkeeping,iosts (foJ r:eqvablesr.il_"*;,_, I1.5
Z.O
,. ',,,i Statepidperty *,;nren!o1y1,
t9
#il?yffit'l?":?":::i::uipment 2'2"'6
'"r',-Materialsi'twaimon-rhsr:iupl ,'.-'l:-::,,ir,'';;::_: year):
:.,:il"'11.r"url, ,
.,,,.,. ,,:,,,,:
.
;r1r1-t'q{ii6'nrocess:rt,00Q b!(s,'t ar,.omplqtqd'qbgt al:rnareriars'{orthenr
r,,,-Fitirhed'goodr: 50o ukel {,gwaiiing-f"Ir-rlr,qndrrurrrn,p*"t,i;.i ixued}.:: ,

*r, house). :r ,
"iffifi;;i?f{ryitiqa:;#ffi,;}'#:x,fiiiffre
at a hiqhet'ptice.;n?,nooifiain
*i.u,uto
kev,.
:
!
""campetitrlq) L,y or t,.i.r* ri"i*r'i*r,ras. *u
,,, gue5s:.is that our:sates
gver: the,next tfrqeelrealyifl,,b_.;b;i;do,OoO
rtrf,,is-iii,nii*. My be*
U,tu, ayear if wq forso the Hi-vdu
Siil;,ji,,ryi"'i'i:iJ:l.llilix;Jrff::i:*"i:1,,^TnTii,',""I,i11,1,,,*
distribution is quite stronsin Hi_varr*iir#.;#ti:,".,:ffil:ilTi.'":?'ffii;#i:;ffiilffi"
vo,ume a ye,,, srnc" our rerd
few of our current dearers might
drop oui iin"'ii *,"y rino ort
we,rJ ,ri,rg bikes for Hi_Vairr.

store. At that point" Hi-\ra!

would regard the bicycle
as having been purchased dollar gross rnargin on each bicycle
from eafdidrl a*A wortO sold_the
pay for it within 30 days. Howwer, ffi_V"ftr *"rlid nale being that Challenger bike
,ut", *oria ,ul.
agree tolake title to any bicycle from the sales of the name_brand
its warehouses for four m.,r.*rr"
-;;;:::.;::""""'
that on" J
had U*"n ln
bikes. Thus. H:-
yanted ro purchase bikes from Baldwin
r,i*r.,.- rn r - r r
months, again paying for it ar i;;.
r,*':.:.?,
bike
jY::
would rernain
Knot
:'t ,"*io"ui
Y' in a Hi_Valu *"t"jti,t;;
; ;;:;
rnirffirl
l,hu,
,1._*.hglesate prices
"t
lnrough tsaldwin's usual channels.
."r;"r;;t.;il;
for two months.
Second Hi-Valu wanted to sell
its Challenger bicy_
cles ar lower prices rhan the
nur"_b*;J;jir.,., ,,
carried and yet still earn approximately
the same
 ', Chapter26 Sltort-R*nAltewatiie:Chaice,Dei;s,ions' A61

trat different, and the tires would have to have the Sulanne L€istet,,iealized,'.s5"',na"OdU 1o da, sorne
"Chal I enget'' molded, into, their sidewalls. Also. prelirniaaryr: finaqcial, aaat sis. of ihis'lpioposal ,6e;
bicycles would have 1o be packed inlboxe$ printed fore, having anY'fljrlherrdiscussions #jh: Karl Xnoti:
the Hi-l/alu and Challenger names'; Ms. Leister She:had.wiittoh {in:'apad the infoimtiim,ihe ntd gath,
that possibly these requirements would'in. ered to,:,use in her iaftial'analysis; *iis,:ih6or*ation: iS
Baldwin's purchasing, iwentorying; and pro- sumnai:izedinExhibii2,'' ,r,
:': '::: : :" .irj'j'i I

costs over and above the added costs'that would

ircurred fot a comparable increas,e in volume- for
QueStions
's regular products.
On the positive side, Ms. Leister was acutely aware
,l, Whatris the,expected added profif fiorn fhe Chal:
the "bicycle boomr had flatlened out, and this plus
economyhad caused Baldwin's sales volumeto
len€erlioe? ;' ',
:,1,

2, What,is,the expected impact.of cannibaliiation of

ffi the past two years. As a result, Baldwjn currently
existing sales?
ms operating its plant at about 75 perce*t of o*e-shift
qacity. Thus, the added volume from Hi:valu,s puf. 3.: W-hat eosts will be ineurred on a one-time basis
rtases could possibly be very attractivs. If agieement cnl1r?" "'"
ouuld be reached on prices, Hi-Valu would sign a can- 4. What are the additiolal,assets and related carrying
frar-t guarailteeing to Baldwin that Hi-Valu woald buy ' 'C0sts?'' 'j,,.
b house-brand bicycles only from Baldwia for a 5. :Wlttr tr ,ne oVerall impact on ths,comparyinterms
&ce-year period. The conlract would thel:be auto- of(6) profits; (&} retum on sales; fC) return:on as,
mtically extended on year-to-year basis, unless one ' sets; and ({ ietur$ on eqUltt?
lrutv gave lhe other at least six-monthsllnotice that it 6. [!af aro the strategic risks and rewards? , ,

did not wish to extend the contract.

7., Whatshouldthecompanl4do?:W1ry?' | :''