In May 1989 Suzanne Leister, marketing vice president of Baldwin Bicycle Company, was mulling over the discussion she had had the previous day with Karl Knott, a buyer from Hi-Valu Stores, Inc. Hi-Valu operated a chain of discount department stores in the Northwest. Hi-Valu's sales volume had grown to the extent that it was beginning to add "house-brand" (also called "private-label") merchandise to the product lines of several of its departments. Mr. Knott, Hi-Valu's buyer for sporting goods, had approached Ms. Leister about the possibility of Baldwin's producing bicycles for Hi-Valu. The bicycles would bear the name "Challenger," which Hi-Valu planned to use for all of its house-brand sporting goods.

Questions
1. What is the expected added profit from the Challenger line?
2. What is the expected impact of cannibalization of existing sales?
3. What costs will be incurred on a one-time basis only?
4. What are the additional assets and related carrying costs?
5. What is the overall impact on the company in terms of (a) profits, (b) return on sales, (c) return on assets, and (d) return on equity?
6. What are the strategic risks and rewards?
7. What should the company do? Why?

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EXHIBIT 1 Financial Statements (thousands of dollars) BALDWIN BICYCLE COMPANY Balance Sheet As of December 31, 1988 Assets Liabilities and Owners' Equity Cash Accounts receivable Inventories Plant and equipment (net) 5 342 1,359 2,756 3,635 $8,092 Current liabilities Noncurrent liabilities Total liabilities Owners' equity $3,478 1,512 4,990 3,102 $8,092 Income Statement For the Year Ended December 31, 1988 Sales revenues Cost of sales Gross margin Other expenses Income before taxes Income tax expense Net income $10,872 8,045 2,827 2,354 473 218 5 255