Noble Bicycles of Glen Arbor, Michigan, is a small batch manufacturer of high-end bicycles. That is, it typically builds bicycles in batches of one to three units. Quality is high, only to be expected when the typical bicycle frame costs $2,500 and up. Yet, profits have not kept pace with top management’s expectations. Management has set a goal of generating a minimum of 25 percent return on assets. As a result of a corporate SWOT analysis, management has identified one critical threat: the costs at Noble are simply too high—and one important opportunity: because of the flexibility of operations and the experience of the design team, many of whom are either professional or serious amateur bicyclists, Noble is well positioned to become an innovation leader. A top management team consisting of the marketing director, finance director, the corporate vice president, the purchasing director, and the director of operations management has developed two alternative strategies: (1) focus on reducing costs through the application of lean systems and procedures, and (2) focus on product innovation (Chapter 4). To assess the two approaches, the team generated the following table.

a. What is Noble Bicycles’ current ROA?
b. How does the lean proposal affect operations at Noble Bicycles?
c. How does the innovation proposal affect Noble Bicycles (why)?
d. Which proposal would you recommend to top management? Why?
e. How much of a change in sales would be required in order to make the returns of the two proposals equivalent?
f. What are the strategic risks of these proposals?

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Category Sales Cost of goods sold Variable expenses Fixed Expenses Inventory Accounts Receivable Other Current Assets Fixed Assets Current Values $12,500,000 $10,625,000 Lean Proposal $12,500,00 $9,375,000 S 650,000 600,000 900,000 500,000 S600,000 600,000 Innovation Proposal $16,000,000 $12,000,000 $ 800,000 750,000 1500,000 $ 600,000 $ 750,000 600,000 750,000 $ 750,000 1,250,000 $ 600,000 S 600,000 S 600,000