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Baldwin Bicycle Company - Case Solution

James S. Reece | Harvard Business Review ( TCG001-PDF-ENG ) | June 01, 2012 (Revision: 2023-08-27)
Abstract:

Suzanne Leister, the marketing vice president of Baldwin Bicycle Company, is considering outsourcing their production to a low-cost manufacturer. This case study allows students to analyze the costs and strategic implications associated with this decision.

Case Questions Answered

  • What is the expected added profit from the Challenger line?
  • What is the expected impact of the cannibalization of existing sales?
  • What costs will be incurred on a one-time basis only?
  • What are the additional assets and related carrying costs?
  • 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?
  • What are the strategic risks and rewards?
  • What should Ms. Leister do? Why?

1.) What is the expected added profit from the Challenger line?

The expected added profit from the Challenger line is computed as follows:

Revenue92.29
Variable Costs
Material39.80
Labor19.60
Overhead (24.50 x 40%)9.80
Total Variable Costs69.20
Unit Cost Contribution23.09

Added profit = unit cost x annual expected volume

= $23.09 x 25,000 bikes

= $577,250 added profit

2.) What is the expected impact of the cannibalization of existing sales?

The expected impact of cannibalization of existing sales is…

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