Question

Bissan Bikes Business Case Should We Build the Supremo or Not?

Bissan Bikes Inc. is a medium-sized producer and wholesaler of bicycles. Bissan’s senior marketing executive, Hardy Walnut, has just finished a meeting with Ashley Snipes, the chief buyer from MikRos.

MikRos operates a successful franchise of independently owned department stores throughout the country. Each store is free to make its own operating decisions but is forced to purchase from the same catalogue, which determines the availability of various products. MikRos’ mountain bike sales have grown to the extent that it is considering introducing its own national brand but lacks the design expertise and the production capacity to do so without a partner, such as Bissan Bikes Inc. partner

Bissan has been one of the leading bike manufacturers since 1963. Their 2018 line consisted of a variety of models for different skill levels and price preferences. They specialized in midto high-end bikes where brand and image have a large impact on sales and market share. The majority of Bissan’s sales were through specialty shops, and a website allowing customers to customize their purchase was under consideration. Mr. Walnut felt that they had a strong brand image which helped them differentiate themselves from their competitors.

MiKRos wants to order 15,000 mountain bikes from Bissan, but MiKRos’s proposal to Bissan had some features which concerned Mr. Walnut. First, MikRos wants to sell its bikes at a discount while still maintaining gross margins comparable to others in the industry. Since MikRos will guarantee an order for 15,000 mountain bikes, MikRos wants to purchase the bikes from Bissan at prices lower than the prices of the bikes sold through Bissan’s usual distribution channels.

Finally, to develop its own national brand, the Supremo, MikRos wants the bike to look different. While maintaining most of the design, the frame would be thicker than the frame of Bissan bikes, to project an image of durability. There would also be small differences in the accessories such as the grips and the reflectors. MikRos wants no sign of Bissan on the bike or on its packaging. Mr. Walnut realizes that these design differences will result in increased production costs.

Mr. Walnut was also concerned about the fact that the sales in this sector are no longer increasing for various reasons. In 2013 Bissan had produced 180,000 mountain bikes, which represented approximately 80% of their production capacity given their current facility. Similar levels were expected for 2014 but an order for 29,000 bikes could drastically improve their future operating results, especially if this one-year contract could be extended to future years. The additional production volume was obviously very attractive if the two parties could agree on a price. Mr Walnut has asked you to analyze this proposal and recommend a decision.

Current cost structure of Bissan is as follows:

Fixed cost: $ 7,543,210

Variable cost per Bissan bike:

Direct Materials: $270.00

Direct Labor: $125.00

Variable Overhead is 50% of direct labor per bike.

Current sales price is $683.53

Supremo Bike offer:

1. Unit price and annual volume: MikRos has guaranteed an order of 15,000 MikRos wishes to pay $635 per bike MikRos will increase the guaranteed order quantity by 10% for the following 5 years.

2. Estimated costs of producing the average Supremo bike will incur an increase of $20 in direct materials and 22% in direct labor per bike. Variable overhead per bike will still be 50% of direct labor. Changes to fixed cost is not expected.

3. Hardy Walnut's opinion on the effect on sales of average Bissan bikes if the proposal is accepted: Some customers comparison shop for bikes, and some may purchase a competitor's bike as a good value purchase. My best guess is that our sales over the next year will be about 180,000 bikes a year if we do not accept the MikRos deal. If we accept it, I think we we'll lose some of our regular bike sales over the year. I expect this cannibalization to be equal to 55% of the quantity we sell to Mikros. That is if we sell Mikros 15,000, we will lose 8,250 (i.e. 0.55x 15,000) from our regular sales. Thus we should adjust our production quantity. These estimates do not include the possibility that a few of our current dealers might drop our line if they find out we're making bikes for MikRos.

ASSIGNMENT 1. Base Case. Build an Excel spreadsheet to help Mr Walnut reach a decision. Report the current year and next 5 years earnings. Make sure any of the input values can be changed without having to change any of the formulas. Also, use relative (e.g., C3), absolute (e.g., $C$3), and mixed (e.g., $C3, C$3) cell references appropriately, so that you can simply copy those formulas to years 1-5. Hint: adjust the numerical formatting of the year 1 calculations before copying; that way the formatting will copy along with the formula. Use color coding and provide a legend for the parameters, the decision variable, and the primary outputs (in this case, the yearly incomes). Also submit a printout of the cell formulas (see “Turn In” section below). 2. Create a Data Table and Scatter (XY) Chart. Analyze the current status for Bissan. Create a Data Table, vary the quantity produced from 0 to 200,000, in increments of 20,000. The output value tracked by the Data Table should be the profits under current settings (no MiKRos deal). Then create a Scatter (XY) Chart with lines and data markers, appropriately titled, labeled, and scaled, from the Data Table. Make the Data Table so that the starting value (0) and the increment value (20,000) can be changed by the user if the user wants to “drill down” or back out further, and the Data Table and chart update automatically. 3. Use Goal Seek to compute Breakeven Values. Specifically, use Goal Seek to find a) Breakeven production quantity of Bissan bikes for current operations in Year 0 (i.e. ignoring MiKRos offer) b) The cannibalization rate that would make Year 5 profits equal to current, Year 0, profits c) The price MiKRos should pay per bike that would make Year 5 profits equal to current, Year 0, profits. When you run Goal Seek for each input value, make sure to restore all other values to their Base Case values. 4. Interpretation/Critical Thinking. If you are Mr Hardy Walnut’s advisor, what insight does the model/analysis provide? Specifically having done the breakeven analysis above and having answered (a)- (c), what would you recommend? Take the deal, ask for price increase, etc.?

Answer 1

After going through the above analysis, it can be said that there is a loss of contribution and net earnings if the Supremo bike offer is accepted by the company. Therefore, it is recommended to either ask for an increase in selling price of Supremo bike or not accept the offer.