Facilitators :

Suman (02) Suraj(16) Sunanda(32) Shivraj(60) Sunaina(11) Shrikant (23)

Q.1 ) What are the important features of this case?

BBC is a mid range full line bicycle manufacturing company. It distributed exclusively through independently owned retailers & speciality bicycle shops. Hi Valu was a discount department store. Hi Valu had proposed a private label agreement. Result in cannibalization of an estimated 3000 units. Terms of the proposal deviated from the standard practice. Relevant Cost Analysis revealed that Challenger deal could be lucrative source of incremental revenue

Data pertinent to Hi-Valu proposal

Q.2) Bring out the data pertinent to Hi Valu proposal?

a. Materials $39.80 b. Labor... $19.60 c. Overhead ( @125% of labor) $24.50 $83.90 (approx.. $84)

1. Estimated first-year costs of producing Challenger bicycles (average unit costs)

2. Unit price and annual volume. Hi-Valu estimates that it will need 25,000 bikes a year & proposes to pay an average of $92.29 per bike for the first year).[ price will increase in proportion to inflation-specified in contract containing inflation escalation clause]. 3. Asset related costs (annual variable cost) a. Pretax cost of funds (to finance receivables/inventories)...18.0% b. Record keeping costs (for receivables/inventories)......1.0 c. Inventory insurance.. ..0.3 d. State property tax on inventory...0.7 e. Inventory handling labor and equipment...3.0 f. Pilferage, Obsolescence, breakage, etc0.5

4. Assumptions for Challenger related added inventories. a. Materials: Two months supply b. WIP: 1,000 bikes, half completed (but all materials for them issued) c. Finished goods: 500 bikes (awaiting to get into Hi Valus warehouse). 5. Impact on regular sales: Some customers compare the bikes and may recognize Challenger bike as a good value bike when compared with other bikes. In 1982, Baldwin sold approx. 99,000 bikes. a. It will sell 1,00,000 bikes if it do not accept the proposal. b. If it accepts the proposal, Baldwin will lose about 3,000 units per year.

Q. 3) Relevant Cost analysis of Hi Valu offer?

Marginal Revenue Less: Variable cost Materials Labor Overhead Total Variable cost Unit contribution Contribution for 25,000 units $39.80 $19.60 $9.80 $69.20 $23.09 $5,77,250 $92.29

Less: Erosion of 3,000 units:

Revenues Average Unit cost Lost CM Net revenue erosion One-time set up cost Net relevant cost

$110.05 $71.67 $30.39 $1,15,155.16 $5000 $ 457,094.84

Q.4) Discuss the managerial accounting theme reinforced in this case?

Cost behavior analysis Profit contribution analysis Long run versus short run product and customer profitability Inventory and receivables carrying cost Working capital management Project return on investment( ROA versus residual income) Balancing quantitative and qualitative issues in a decission.

Q.5) Strategic analysis of Hi Valu offer? HI- VALUs positioning of CHALLENGER bicycles:

VALUE BIKE

LOW PRICE BIKE

LOW PRICE & MIDQUALITY BIKE

STRATEGICAL ANALYSIS (Contd)

 NO CLEAR COMPETITIVE ADVANTAGE:
Manufacturi ng efficiency is low

No top-of-theline product

No patentable technology or process

Q.6) What is the learning from this case?

How an explicit cost analysis would help the firm to understand the relative attractiveness of the strategic alternatives. The financial aspects of the firm and how would the same get affected by external forces. A clear portrait of the existing and expected threats to a firm A profitable decision could be created