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ACCT 3335 – Winter 2019
Case Assignment
Husky Bicycle Company
In May 2018, Suzanne Sommers, marketing vice president of Husky Bicycle Company,
was mulling over the discussion she had had the previous day with Tom Brady, a buyer
from Robie Discount Sports (RDS). RDS operated a chain of discount department
stores in the Northeast. RDS’s sales volume had grown to the extent that it was
beginning to add “house-brand” (also called private-label) merchandise to the product
lines of several departments. Brady, RDS’s sporting-goods buyer, had approached
Sommers about the possibility of Husky producing bicycles for RDS. The bicycles would
bear the name ‘Speedster’ which RDS planned to use for all of its house-brand sporting
goods.
Husky had been making bicycles for almost forty years. In 2018, the company’s line
included ten models, ranging from a small beginner’s model with training wheels to a
deluxe twelve-speed adult’s model. Sales were at an annual rate of about $10 million.
The company’s 2017 financial statements appear in Exhibit 1. Most sales were made
through small independently owned retailers and bicycle shops. Husky had never before
distributed its products through department store chains of any type. Sommers felt that
Husky bicycles had the image of being above average in quality and price, but not of
being a “top of the line” product.
RDS’s proposal had features that made it quite different from Husky’s usual way of doing
business. First, RDS needed access to a large inventory because it had had great
difficulty in predicting bicycle sales, both by store and by month. RDS wanted to carry
this inventory in its regional warehouses but did not want title on a bicycle to pass
from Husky to RDS until it was shipped from a regional warehouse to a RDS store. At
that point, RDS would consider the bicycle purchased from Husky, and would pay for it
within thirty days. However, RDS would agree to purchase any bicycle that had been in
one of its warehouses for four months, again paying for it within thirty days. Brady
estimated that, on average, a bike would remain in a RDS regional warehouse for two
months.
Second, RDS wanted to sell Speedster bicycles at lower prices than the name-brand
bicycles it carried, yet still earn approximately the same dollar gross margin on each
bicycle sold, the rationale being that Speedster bike sales would take away from namebrand bike sales. Thus RDS wanted to purchase bikes from Husky for less than the
wholesale price of comparable bikes sold through Husky’s usual channels.
Finally, RDS wanted the Speedster bike to look different from Husky’s other bikes.
While the frame and mechanical components could be the same, the fenders, seats, and
handlebars would need to be somewhat different and the tires would have the name
“Speedster” molded into their side­ walls. The bicycles would also have to be packed in
boxes printed with the RDS and Speedster names. Sommers expected these
requirements to increase Husky’s purchasing, inventorying, and production costs over
the added costs that would be incurred for a comparable increase in volume for Husky’s
regular products.
On the positive side, Sommers was acutely aware that the “bicycle boom” had flattened
out; this plus a poor economy had caused Husky’s sales volume to fall in the past two
years. 1 As a result, Husky was currently operating its plant at about 75 percent of oneshift capacity. The added volume from R D S ‘s purchases could be very attractive. If an
agreement could be reached on prices, RDS would sign a contract guaranteeing to buy its
house­brand bicycles only from Husky for a three-year period. The contract would be
extended automatically on a year-to-year basis unless either party gave at least three
months’ notice that it did not wish to extend the contract.
Suzanne Sommers realized she needed to do some preliminary financial analysis before
having any further discussions with Tom Brady. She had written down the information
she had gathered to use in her initial analysis; this information is shown in Exhibit 2.
The American bicycle industry had become very volatile in recent years. In the region that is served by Husky from 1997
through 2000 sales averaged about 7 million units a year. By 2007 the total was up to a record 15 million units. By 2009
volume was back down to 7.5 million units. By 2017 volume was back up to 10 million units, but still well below the peak
years.
1
Exhibit 1
Financial Statements (thousands of dollars)
Balance Sheet as of December 31, 2017
Assets
Cash
Accounts receivable
Inventories
Plant and equipment (net)
$ 342
1,359
2,756
3,635
$ 8,092
Income Statement
For the year ended December 31, 2017
Sales revenue
$ 10,872
Cost of sales
8,045
Gross margin
2,827
Selling & Admin. expenses
2,354
Income before taxes
473
Income taxes
218
Net income
$ 255
Liabilities and Equity
Accounts Payable
Accrued expenses
Short term bank loans
Long term note payable
Total liabilities
Owners’ equity
$ 512
340
2,626
1,512
4,990
3,102
$ 8,092
Exhibit 2 Data Pertinent to RDS Proposal
(Notes Taken by Suzanne Sommers)
1.
Estimated first-year costs of producing Speedster bicycles (Average unit costs. assuming a
constant mix of models)
Materials
$ 39.80
Labour
19.60
Overhead (@ 125 % of labor)
24.50
$ 83.90
Notes:
(1) Includes items specific to models for RDS not used in our standard models.
(2) Accountant says about 40 percent of total production overhead cost is variable; 125
percent of direct labour dollar rate is based on volume of 100,000 bicycles per year.
(3) Fixed manufacturing overhead totals about $1.5 million per year.
2.
Unit price and annual volume: RDS estimates it will need 25,000 bikes a year and proposes
to pay us (based on the assumed mix of models) an average of $92. 29 per bike for the first
year. Contract to contain an inflation escalation clause such that price will increase in
proportion to i nflat1on-caused increases in costs shown in item 1 above; thus the $92. 29
and $83.90 figures are in effect “constant-dollar” amounts. Brady intimated that there was
very little if any negotiating leeway in the $92. 29 proposed initial price.
3.
Asset-related costs (annual variable costs as percent of dollar value of assets)
Pre-tax cost of funds (to finance receivables or inventories)
Record-keeping costs (for receivables or inventories)
Inventory insurance
State property tax on inventory
Inventory-handling labor and equipment
Pilferage, obsolescence, breakage etc.
18.0 %
1.0
0.3
0.7
3.0
0.5
4.
Assumptions for Speedster-related added inventories (average over the year):
Materials: two months’ supply.
Work in process: 1,000 bikes, half completed (but all materials for them issued)
Finished goods: 500 bikes (awaiting next carload lot shipment to a RDS warehouse)
5.
Impact on our regular sales: Some customers comparison shop for bikes and many of them are
likely to recognize a Speedster bike as a good value when compared with a similar bike (either
ours or a competitor’s) at a higher price in a non-chain toy or bicycle store. In 2017 we sold
98,791 bikes. My best guess is that our sales over the next three years will be about 100,000
bikes a year if we forgo the RDS deal. If we accept it, I think we’ll lose about 3, 000 units
of our regular sales volume a year, since our retail distribution is quite strong in RDS’s
market regions. 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 RDS. Also, I’m not
entirely confident about only losing 3,000 units due to in effect competing against ourselves.
6.
I think I need to work out the profitability of the bikes not just to us but also to our regular
independent store customers. How will they be affected by RDS Speedster bikes?
Required: Play the role of a project analyst assigned to Suzanne Sommers, Vice President
of the Husky Bicycle Company. You should prepare a confidential and professionally
written report that she will use both in her discussions with Tom Brady of RDS and in her
meetings next week with the top executives of Husky where the five year strategic plan for
the company will be discussed.
Below is a list of questions that may be important to include in your report. These issues
should be addressed in your report but they should NOT be considered the sole
“requirements” of this assignment. Use them as a jumping off point to an analysis of
whatever you consider important to the company at this stage in its development, the
current market situation, strengths and weaknesses of the organization, and the overall
economic climate the firm finds itself in, the current stage in the product life cycle, etc.
Your report should be approximately five to seven pages plus any exhibits or schedules
that you deem appropriate to support your analysis. Your recommendations should be
logically supported and address not only the short term implications of the decision on the
RDS order but also the longer term strategic implications as well.
Questions to consider:
(1) What is the expected annual profit (loss) associated with taking on the RDS order?
(2) How sensitive are the calculations to changes in some of the assumptions provided?
(3) Will the RDS deal likely be something we would like to replicate with other major
retailers?
(4) What are the alternatives that Husky has to choose from? Be sure to indicate the
advantages and disadvantages of each.
ACCT 3335
Group Project – Case assignment
Your submission must be one cohesive document of less than 5,000 words (plus
appendices). As previously noted, a single hard-copy must be handed in to your
instructor prior to class on Thursday March 28. You have more than four (4) weeks
from February 26 to the deadline to complete the case analysis – no extensions
will be granted.
Guidelines for submission:
Your submission should be broken down into the following components/headings:
Pts Component/Heading
Expectation
Title /Cover Page
Case name, group member names
Executive Summary
One page summarizing the problem and your group’s
2
recommendation. This should be the last piece completed.
Problem Identification
A paragraph outlining the key problem facing the organization
and Situational
in the case. Further work should identify other issues that
2 Analysis
need to be considered (desires of stakeholders for example).
While some of this analysis may be included as an Appendix,
the key points should be included in the body of the report
Alternatives
These may be outlined in the case itself but may include
Considered
alternatives determined by the group. Each alternative should
be presented in terms of its “pros and cons” relative to solving
4
the problem identified and items identified in the situational
analysis. Financial implications of the various alternatives
should be developed in appendices, but the outcomes should
be included in the body of the report.
Recommendation
This should be a clear statement of the group’s recommended
3
alternative course of action and why that alternative was
chosen.
Implementation Plan
This should be a brief statement of the steps necessary to
implement the recommended alternative. Included here should
2
be ways to address the “cons” of the chosen alternative or
deal with any conflicts among the stakeholders.
Appendices
Detailed support for the components above. If there are
3
quantitative analysis (and there should be) they must be
clearly labeled and legible.
Bibliography/Footnotes These should be in good form and allow a reader to “fact
check” any statements or assumptions used in the analysis.
Group Dynamics/Team A single page from each group member identifying her/his
Work
specific contribution and a statement of what was learned from
working in the group.

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