1. Prepare case report analyzing the issues and making appropriate recommendations. Assume you are, a consultant advising

Ms. Leister.

Write report, following the format described below. Consider both quantitative and qualitative factors. Include any appropriate tables of numbers; attach longer tables to the end of your report

In May 1983, Suzanne Leister, marketing director of Baldwin Bicycle Company, was mulling over the discussion she had had the previous day with Karl Knott, a buyer from Hi-Valu Stores. Hi-Valu operated a chain of discount department stores in the North West. Hi-Valu's sales volume had grown to the extent that it was beginning to add its "own-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 producing bicycles for Hi-Valu under its own-brand name of "Challenger".

Baldwin had been making bicycles for almost 40 years. In 1983, the company's line included 10 models, ranging from a small beginner's model with training wheels to a deluxe 12 speed adult's model. Sales were currently at an annual rate of about $10 million and Baldwin's 1982 financial statements appear in Exhibit 1. Most of Baldwin's sales were through speciality bicycle shops. Baldwin had never before distributed its products through department store chains of any type (e.g. Rebel Sports, K-Mart etc). Ms. Leister felt that Baldwin bicycles had the image of being above average in quality and price, but not a "top of the line" product.

Hi-Valu's proposal to Baldwin had features that made it quite different from Baldwin's normal way of doing business. First, Hi-Valu wanted to sell its Challenger bicycles at lower prices than the well-known brand- name bicycles it carried (e.g. Trek), and yet still earn approximately the same dollar gross margin on each bicycle sold - the rationale being that Challenger bike sales would take away from the sales of the brand- name bikes. Thus, Hi-Valu wanted to purchase bikes from Baldwin at lower prices than the wholesale prices of comparable bikes sold to Baldwin's speciality bicycle shops.

Second, Hi-Valu wanted the Challenger bike to be somewhat different in appearance from Baldwin's other bikes. While the frame and mechanical components could be the same as used on current Baldwin models, the mud-guards, seats, and handlebars would need to be somewhat different, and the tyres would have to have the name "Challenger" molded onto them. Also, the bicycles would have to be packed in boxes printed with the Hi-Valu and Challenger names. These requirements were expected by Ms. Leister to increase Baldwin's purchasing, inventorying, and production costs over and above the added costs that would be incurred for a comparable increase in volume for Baldwin's regular products.

On the positive side, Ms. Leister was acutely aware that the "bicycle boom" had flattened out, and this plus a poor economy had caused Baldwin's sales volume to fall in the past two years.1 As a result, Baldwin currently was operating its plant at about 75% of a one-shift capacity. Thus, the added volume from Hi-Valu's purchases could possibly be very attractive. If agreement could be reached on prices, Hi-Valu would sign a contract guaranteeing to Baldwin that Hi-Valu would buy its own-brand bicycles only from Baldwin for a three-year period. The contract would then be automatically extended on a year-to-year basis, unless one party gave the other at least three months notice that it did not wish to extend the contract.

Suzanne Leister realized she needed to do some preliminary financial analysis of this proposal before having any further discussions with Karl Knott. She had written on a pad the information she had gathered to use in her initial analysis