Baldwin Bicycle Company is the focus of the case. Quite obviously they sell bicycles but what becomes apparent is the industry sees a rollercoaster effect. Bicycle sales saw an average 7 million units sold between 1967 and 1970. Sales increased to 15 million and dropped back down to about 7.5 million units over the next 5 years. In the current year of the case, 1982, unit sales are listed at about 10 million. Ms. Leister, a representative of Baldwin, is offered an opportunity to sell Baldwin bicycles at Hi-Valu stores. This opportunity would require more than a few things on Baldwin’s side. Besides manufacturing an entirely new design of bike they would label it Challenger and require the name on all tires as well. Hi-Valu would purchase each bicycle at $92.29 with a one-time payment of $5000. Estimates of agreeing to the contract put unit sales at 100,000 which is above the current units sold per year.
The average cost of producing a Challenger bicycle is listed at $83.90. Subtracting fixed overhead, or adding only the 40% overhead, leaves the relevant cost at $69.20. Contribution margin is $23.09 per unit.
Cannibalization costs from loss of sales are calculated at $129,960. Units lost total 3000 so taking sales over total units, removing variable cost per unit to leave just the fixed then multiplying by units lost (3000) derives this number.
Total income can be calculated for by subtracting costs from revenues. Subtracting…