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Baldwin Bike Company

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Introduction: The marketing vice president of a manufacturing bicycle company (Baldwin Bicycle Company), is considering the offer of a buyer from Hi-Valu stores, Inc. who wants BBC to produce bikes for them. This offer represents an opportunity for that “mid-market” bicycle manufacturer, but is also represent costs. Before taking a decision, Suzanne Leister has to think about all the financial, strategic and marketing aspects.

Question 1: What is the relevant cost per unit of manufacturing a Challenger bike?

To answer this question, we use the relevant cost analysis. According to this method, relevant costs and revenues are the only costs to be taken into account when assessing the different possibilities alternatives in decision-making scenarios.
Here, Baldwin Bicycle Company (BBC) has to decide wether it will accept Hi-Valu’s offer. This offer represents some revenues, but also some costs, due to the loss of 3,000 units sold (expressed by the CEO of the company in page 2). We tried to balance the total contribution and the net revenue erosion in the Excel file given in appendix.

To determine the relevant cost per unit of manufacturing a Challenger bike, we may reconsider all the elements given in Leister’s primary analysis.
Hi-Valu offers to purchase the units at $92.29, which results in a contribution margin of $23.09.
However, it is said that Leister anticipates a loss of 3000 of Baldwin Bicycle Company’s regular units sold. This results in a loss of $115,141.53 in sales ($38.38 per bicycle over 3,000 units). - However at that point, it would be interesting to notice that the 3,000 units’ loss could have happened even if BBC rejects the deal! But since the decline differs from the base scenario assumptions, the loss of sales is relevant.-

Finally, even taking into account the estimated 3,000 units loss, BBC would realize a net

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