Baldwin Bicycle Company is its own independent bicycle shop that has been in business for almost 40 years. Last year Baldwin had sold 98,791 bikes which accounted for nearly $10 million in sales for 1982. Suzanne Lesiter is the marketing Vice President of Baldwin and has just been offered a proposition from Karl Knott, a buyer from Hi-Valu to possibly start producing bikes for them. Baldwin had never conducted any business with a chain department such as Hi-Valu since it was use to its own independent retailers. There were three conditions that must be met in order for the deal to be made between the two companies. The first condition is that Hi-Valu wants to have ready access to a large pool of inventory, but didn’t want ownership of the bicycles till it reached its stores or would pass the four month deadline of being held at their regional warehouses.
Hi-Valu would then have 30 days to pay Baldwin. When looking at this new system of inventory, Baldwin will be adding new costs that have to deal with the regional warehouses of Hi-Valu. These asset related costs include record keeping costs of $7,156.38, inventory insurance of $2,146.91, state property tax of $5,009.46, inventory-handling of $22,066.13, and pilferage of $3,578.13. These relevant costs add up to about $39,957.07. Baldwin must also add other asset costs for the way the inventory system is being run. Baldwin will not expect to show any sales for at least the first two months considering most of their bikes will be at the regional warehouses.
Even after they have been transported to one of Hi-Valu’s stores or have reached the four month deadline, Baldwin still has to wait an additional 30 days for their payment from Hi-Valu. These extra variable costs include materials for two months at $165,833.33, Work in Progress at $34,600, Finished Goods at $34,600, Goods at Hi Valu at $288,333.33, and the pay period of 30 days for the Accounts Receivable at $192,637.50. As a whole there are asset related costs of $755,594.57. This outweighs the relevant revenue that is gained from the “Challenger” series which makes for high capital investments which seem very risky. The fact that Baldwin must pay interest on the inventory also adds additional costs which skyrocket the relevant cost up to $1,427,419.15 at the worst case scenario of four months.