4. Noble Bicycles of Glen Arbor, Michigan, is a small batch manufacturer of high-end bicycles…. 1 answer below »
4. Noble Bicycles of Glen Arbor, Michigan, is a small batch manufacturer of high-end bicycles. That is, it typically builds bicycles in batches of one to three units. Quality is high, only to be expected when the typical bicycle frame costs $2,500 and up. Yet, profits have not kept pace with top management’s expectations. Management has set a goal of generating a minimum of 25 percent return on assets. As a result of a corporate SWOT analysis, management has identified one critical threat: the costs at Noble are simply too high—and one important opportunity: because of the flexibility of opera- tions and the experience of the design team, many of whom are either professional or serious amateur bicyclists, Noble is well positioned to become an innovation leader. A top management team consisting of the marketing director, the finance director, the corporate vice president, the purchasing director, and the director of operations man- agement has developed two alternative strategies: (1) focus on reducing costs through the application of lean systems and procedures (Chapter 8), and (2) focus on product innovation (Chapter 4). To assess the two approaches, the team has generated the fol- lowing table.
Category
Current Values
Lean Proposal
Innovation Proposal
Sales
$12,500,000
$12,500,00
$16,000,000
Cost of goods sold
$10,625,000
$9,375,000
$12,000,000
Variable expenses
$ 750,000
$ 650,000
$ 800,000
Fixed Expenses
$ 750,000
$ 600,000
$ 750,000
Inventory
$ 1,250,000
$ 900,000
$ 1,500,000
Accounts Receivable
$ 600,000
$ 500,000
$ 600,000
Other Current Assets
$ 600,000
$ 600,000
$ 750,000
Fixed Assets
$ 600,000
$ 600,000
$ 600,000
a. What is Noble Bicycles’ current ROA?
b. How does the lean proposal affect operations at Noble Bicycles?
c. How does the innovation proposal affect Noble Bicycles (why)?
d. Which proposal would you recommend to top management? Why?
e. How much of a change in sales would be required in order to make the returns of the two proposals equivalent?
f. What are the strategic risks of these proposals?