To: Gary Colbert
From: Rachel Schmieding
Re: Cliff Jumper
Date: January 31, 2011

There are many aspects that Cliff Jumper needs to consider when deciding whether or not to accept Hi-Valu's proposition about making a low priced bike. Not only has the demand for bicycles flattened, but also Cliff Jumper's sales volume. Hi-Valu is proposing that Cliff jumper should make a low priced bike for their chain retail stores. Cliff Jumper believes that they are a high quality bike, and the making of this type of bike may ruin that image. However, they need added sales. On one hand, Hi-Valu believes that they will be selling about 24,000 bikes a year. On the other hand, if they choose to accept this proposal, they will be taking on added …show more content…

The loss of profit would be 3,000 unit times the contribution price per unit of $25.00. This is assuming they lose 3,000 a year every year because of this choice.

It is also safe to assume that the sales volume will differ from what Hi-Valu had projected. If the market demand for bicycles is flattening, I believe that the sales volume each year will start leveling off and possibly decline. If this happens, the profits for this company will start falling. Not only is this an issue, but they are going against their own company image, and this three year contract may smear their image forever. If Hi-Valu does not keep this contract with them after the three years, they may not have enough sales of their own high end brand that they may post a loss. These are things that the company needs to consider. In my honest opinion, if this company wants to have this contract, because their sales are not doing so well, I would say that they need to counter the contract offer with an extended time period of at least 5 to 10 years. This will allow for profit coverage. Again, though, after the five to ten years is up, they will be faced with the issue of building back up their reputation of having high quality bikes.

Appendix

Exhibit A
DATA PERTINENT TO HI-VALU PROPOSAL
(Notes taken by Suzanne Leister)

Estimated first-year costs of producing Challenger bicycles (average unit costs, assuming a constant mix of models): Components and Materials