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Case Translation:
In May 1983, Deputy General Manager Li, head of the marketing department of Bowen Company, was
thinking about the proposal made by Manager Liang, the purchasing manager of the high-end company the
day before yesterday. High-End Company is a low-price department store in the northwest United States.
It is currently growing rapidly and has begun to sell products under its own brand. Mr. Liang is the
purchasing manager of the sports equipment department of High-end Company. He hopes that Bowen
Company will make OEM (original equipment manufacturer; in the business world, this means a company
that makes a product to be sold under another company’s brand name) bicycles for High-end Company.
High-end The company plans to name the bicycle produced by Bowen the "Challenger".
Bowen Company has a history of forty years. In 1983, the company produced ten types of bicycles, ranging
from children's training bikes to adult twelve-speed sports cars, with annual sales of approximately US$10
million. The financial statements are shown in Table 1. Bowen's products are mainly sold through sports
equipment stores and bicycle specialty stores, never through department stores. The quality and price of
Bowen's bicycles are above average (mid-to-high-end products), but they are not the highest-end products.
The U.S. bicycle market segmentation is detailed in Appendix 1.

The transaction conditions proposed by high-end companies are different from the general conditions,
including the following points:
First, High-End Company stated that because it is difficult to predict the sales of bicycles, it must maintain
a considerable inventory of bicycles in warehouses around the country. However, High-End Company
believes that the inventory in its warehouses is still the property of Bowen Company, and only when the
bicycles are shipped from the warehouse The sales will not be considered until they are shipped to the
branches of the high-end company. The high-end company will pay off the payment within thirty days.
Second, the high-end company plans to replace bicycles of other well-known brands with "Challenger", but
the profit of each bicycle is still the same, so it requires Bowen Company to lower the price. Of course, the
price of "Challenger" bicycles will also be higher than that of bicycles of well-known brands. The price is
low.
Third, high-end companies want a "challenger" appearance, which is different from the styling of Bowen's
bicycles. The frame and mechanical parts need to be the same, and the tires, page boards, seat cushions,
handles, etc. also need to be different, and the sides of the tires also need to be different. The word
"Challenger" must be printed, and the packaging box must also be printed with the words "High-end
Company", "Challenger", etc. Of course, these requirements will increase the cost.
Vice President Li also learned that the popularity of bicycles in the United States has passed. Coupled with
the poor economic climate in the United States, Bowen's sales have declined for two consecutive years.
Currently, Bowen's output is only 75% of the single-shift production capacity. , the high-end company's
order can increase production capacity utilization. If both parties agree on the transaction price, the high-
end company can guarantee that it will only purchase bicycles of the company's own brand from Bowen
Company within three years, and after the three-year contract expires, one bicycle per year will be
purchased. The contract is automatically extended every year, but either party can cancel the contract by
notifying the other party three months in advance.
Vice President Li made some estimates for this transaction;

4. Inventory estimation:
Ingredients: Two months:
Semi-finished products: 1,000 vehicles;
Finished product: 500 vehicles (in Bowen Company warehouse)
Finished product: 4,000 vehicles (in high-end company warehouse)
5. Impact on current business:
Some consumers will search and purchase everywhere, and they will definitely see that the quality of the
"Challenger" is the same as the Bowen bicycle priced at $200 in general sports equipment and bicycle stores,
but the price of the "Challenger" in the high-end company is only $133 U.S. dollars. In 1982, Bowen
Company sold 98,791 vehicles. Excluding orders from high-end companies, Bowen Company expected to
sell 100,000 units per year in the next three years; if orders from high-end companies were accepted, the
distribution of high-end companies would be the main sales areas of the company and Bowen Company
overlap, and Bowen Company estimates that its original small dealers will lose 3,000 sales opportunities.
However, this does not include dealers who find that Bowen Company produces "challenges" for high-end
companies. He refused to sell Bowen's bicycles. The current price of Bowen's bicycles sold to dealers and
specialty stores is $110.

Question:
If you were the person in charge of Bowen Company, would you accept orders from high-end companies?
Why? What are your main decision-making considerations?
Answers:
Important points  DISADVANTAGES
- High-End Company owns a low-priced department store, but the products from Bowen company
range in mid-to-high pricing level  I thought that it will be difficult because I am sure that High-
End company also proposed that Bowen company can also sell their products in their unsuitable
department store.
- “Second, the high-end company plans to replace bicycles of other well-known brands with
"Challenger", but the profit of each bicycle is still the same, so it requires Bowen Company to lower
the price. Of course, the price of "Challenger" bicycles will also be higher than that of bicycles of
well-known brands. The price is low.”  it will result in lower profit margins in Bowen Company’s
profit. Although it might drive a higher sales volume, I believe that the lower pricing could reduce
the profit margins, well there’s also a possibility of the additional cost associated with the
customization.
- “Third, high-end companies want a "challenger" appearance, which is different from the styling of
Bowen's bicycles. The frame and mechanical parts need to be the same, and the tires, page boards,
seat cushions, handles, etc. also need to be different, and the sides of the tires also need to be
 different. The word "Challenger" must be printed, and the packaging box must also be printed with
the words "High-end Company", "Challenger", etc.”  Increased Production Costs: Fulfilling the
customization requirements, such as unique branding, packaging, and component differences,
could lead to higher production costs for Bowen Company. These additional expenses may eat into
the company's margins and affect overall profitability.
- “High-End Company stated that because it is difficult to predict the sales of bicycles, it must
maintain a considerable inventory of bicycles in warehouses around the country. However, High-
End Company believes that the inventory in its warehouses is still the property of Bowen Company,
and only when the bicycles are shipped from the warehouse The sales will not be considered until
they are shipped to the branches of the high-end company. The high-end company will pay off the
payment within thirty days.”  poses challenges in inventory management. Why?
o Managing a large inventory spread across multiple locations requires robust inventory
management systems capable of tracking the movement and status of each bicycle
accurately, which such systems can be costly and time-consuming, especially if Bowen
Company does not already have sophisticated inventory management infrastructure in
place. (The financial input cycle will be slowing down).
o Maintaining high levels of inventory ties up valuable financial resources that could be
allocated elsewhere in the business. Bowen Company would need to invest substantial
capital in purchasing, storing, and managing the inventory, which could impact cash flow
and liquidity. Additionally, the longer bicycles remain in inventory, the greater the risk of
depreciation or obsolescence, further reducing their value over time.
o Carrying a large inventory incurs carrying costs such as warehousing expenses, insurance,
taxes, and the opportunity cost of tying up capital that could be invested elsewhere for
better returns. These carrying costs can significantly impact the overall profitability of
Bowen Company's operations, particularly if sales do not materialize as expected.
- “Vice President Li also learned that the popularity of bicycles in the United States has passed.
Coupled with the poor economic climate in the United States, Bowen's sales have declined for two
consecutive years. Currently, Bowen's output is only 75% of the single-shift production capacity.
the high-end company's order can increase production capacity utilization. If both parties agree on
the transaction price, the high-end company can guarantee that it will only purchase bicycles of
the company's own brand from Bowen Company within three years, and after the three-year
contract expires, one bicycle per year will be purchased. The contract is automatically extended
every year, but either party can cancel the contract by notifying the other party three months in
advance.”  Problems:
o The declining popularity of bicycles in the United States and the poor economic climate
indicate a challenging market environment. If market conditions worsen further or if
consumer preferences shift away from bicycles altogether, Bowen's sales could continue to
decline, exacerbating its reliance on the High-end Company to sustain its operations.
o Over-reliance on a Single Customer: Bowen's decision to accept the High-end Company's
order means that a substantial portion of its sales will be tied to this one customer. If the
High-end Company were to reduce or cancel its orders in the future, Bowen would face a
significant decline in revenue, potentially leading to financial instability or even business
closure.
o Brand Dilution and Market Reputation Risk: Bowen's decision to produce bicycles under
the High-end Company's brand may also impact its own brand reputation and market
positioning. Associating its products with a lower-priced department store brand could
 potentially dilute Bowen's brand value and perception among consumers, affecting its
ability to command premium prices or attract customers in the future.
o Limited Flexibility and Negotiation Power: Entering into a three-year contract with the
High-end Company, with automatic extensions and cancellation clauses, may limit
Bowen's flexibility to adapt to changing market dynamics or explore alternative sales
opportunities. Moreover, Bowen may find itself in a weaker negotiating position,
potentially subject to unfavorable terms dictated by the High-end Company.
Important points: ADVANTAGES
 Increase sales volume and
 capacity utilization – “The degree to which Bowen Company's production capacity is being used to
manufacture bicycles. Currently, Bowen's output is only at 75% of its single-shift production
capacity, indicating that there is unused capacity within the manufacturing facilities. Accepting the
order from the High-end Company would increase Bowen's production volume, thereby utilizing
more of its available production capacity. By utilizing more of its capacity, Bowen aims to maximize
efficiency and productivity, which can help optimize its operational performance and potentially
improve profitability.”
***How to decide in calculation way? Count the cost and profit margin.