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Table of Contents
Part 1. Introduction Part 2. Quantitative Analysis (Q. 1-5) Part 3. Qualitative Analysis (Q. 6) Part 4. Decision Time (Q. 7)
Introduction
BBC Overview
Manufactures and sells bikes to independent bike stores Above average in quality and price $10M annual sales. Sales declined in past 2 years Factory operating at reduced capacity
Hi-Valu Proposal
Sell bikes to a department store chain Use Challenger Label. Annual Sales of 25,000. Extra inventory costs Sell at lower than usual wholesale prices Small one time design costs 3 year deal, 6 month notice to opt out. We have unused factory capacity
@Copyright by Group 6 B8109 5
Costs
$83.90 to manufacture. $92.29 selling price
Split between materials, labor, direct overhead and indirect overhead.
Costs (continued)
Inventory
Raw materials Work in progress Finished goods in house Finished goods outside the factory.
Accounts Payable
Risks
Loose 3000 sales of regular line of bikes Existing independent stores may drop our products
Alternatives
Refuse proposal and continue business as usual Accept the Hi-valu proposal. Negotiate the Hi-Valu proposal Approach another department store for a better deal. Business as usual but lower our prices
@Copyright by Group 6 B8109 9
Question 1.
What is the expected added profit from the Challenger line?
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Q.1 What is the expected added profit from the Challenger line?
Added profit, does not include cannibalization Contribution = added sales added cost Added cost: variable cost fixed cost one time cost (R&D) asset related cost (expenses)
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Q.1 What is the expected added profit from the Challenger line?
added cost (per unit) = variable cost (per unit)
= materials + direct labor +variable part of overhead
= $39.8 + = $69.2
$19.6
($24.5 40%)
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Q.1 What is the expected added profit from the Challenger line?
Estimated sale of Challenger 25,000 per year Average price $92.29 per bike
Total Contribution = unit contribution #of units sold
Question 2.
What is the expected impact of cannibalization of existing sales?
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Question 3.
What costs will be incurred on a one-time basis only?
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Q4: what are the additional assets and related carrying cost? increase in inventories Baldwins
warehouse
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amount
165,833.33 61,850.00 41,950.00
calculation
39.8 * 25000 / 12 * 2 [39.8+(19.6+24.5)/2] * 1000 83.9 * 500
349,583.33
83.9 * 25,000/12*2
192,270.83
92.29 * 25000 / 12
Additional Assets :
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Asset-related costs
Pretax Cost of funds
(Inventories and receivables )
11.5%
Recordkeeping Costs (Inventories and receivables ) Inventory Insurance State Property Tax on Inventory Inventory-handling Labor and Equipment Pilferage, Obsolescence, Damage, etc.
Total
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Assets-related Costs
categories
items
amount
calculation
62,015.67
59,429.17
349,583.33 * 17%
receivable-ralated costs
25,956.56
192,270.83 * 13.5%
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The most direct way to solve this problem is to assume accepting the contract and to calculate the each
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Other Expenses
Income before Taxes
2,354,000.00
473,000.00
2,354,000.00
802,497.41
46.00%
46.00%
218,000.00 255,000.00
369,148.81 433,348.6
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regular production
Calculation
Challenger
10,674,899.54
2,307,250
92.29 * 25000
Total Revenue :
12,982,149.54
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7,943,250.73
1,730,000
69.2*25000
Total Cost:
963,250.73
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(3) Expense
Research and Development Expense:
one-time added costs of preparing drawings and/or arranging sources for fenders, seats, handlebars, tires, and shipping boxes that differ from those used in our standard modes; approximately $5,000
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Assets Case Accounts Receivable Inventories Pant and Equipment (net) $342 1,359 2,756 3,635 $8,092
Liabilities and owners equity Current liabilities Noncurrent liabilities Total liabilities Owners equity $3,478 1,512 4,990 3,102 $8,092
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Question 6
Identify those consequences that cannot be expressed in quantitative terms and evaluate them against each other and against the measured consequences. Answers question #6: What are the strategic risks and rewards?
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Risks
Cannibalization Damage to Brand Image Problems with Small Dealers Impact to Inventory Buyer Monopoly Decrease in Demand
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Reward$
Profit$$$$$ New Market$ Investment Opportunity New Technology Initial Public Offering (IPO) Plant Utilization Supplying Other Department Stores Capture Market Trend
@Copyright by Group 6 B8109 37
Decision Time
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Profit Margin Calculation Profit Margin (New) Profit Margin (Old) Difference Unit profit / Unit cost = $8.39 / $83.90 = 10% Unit profit / Unit cost = $28.62 / $81.43 = 26.6% (26.6 10) / 26.6 = 63.8% = 64% Decrease
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$5000 one time fixed cost over the first 3 years of the contract
Unit Revenue (UR) Unit Variable Cost (UVC) Unit Contribution Contribution % Break Even Point
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Decision Conclusion
Reasonable Quantitative Risk / Reward Ratio Reasonable Qualitative Risk / Reward Ratio
Accept the deal
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Questions ?
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Thank You!
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