Baldwin Bicycles

ACTG 313 O Brien Team NUMBER SIX Eric Falk Jacob Griego Vincent Sermona Belle Wang ShihShih-hao Wang

BALDWINS HISTORY
American bicycle industry was volatile in 70s. Baldwins sales are through independently owned retailers and bicycle shops. Baldwins product image: Above average; Not top-of-the-line. Currently, Baldwin operates its plant at about 75% of one-shift capacity. 1982 Sales were 98,791 bikes ($10.8M) but have decreased in the past 2 years.
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Hi-Valus PROPOSAL HiOne-time Design Costs: $5,000 Unit Price for Baldwin: $92.29 (Average) Volume: 25,000 bikes a year Impact on Baldwins Sale: Lose 3,000 units annually Hi-Valu will pay for a bike when its shipped from the warehouse to retail store

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MANUFACTURING COSTS
Estimated 1st-Year Costs Total Materials $ 39.80 Labor $ 19.60 Overhead (@125% of labor) * $ 24.50 Total $ 83.90
*: 40% of total production overhead cost is variable.

Relevant $ 39.80 $ 19.60 $ 9.80 $ 69.20

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WORKING CAPITAL INVESTMENT COST

Average Inventory Assumptions:
Raw Materials Inventory (two month supply) =25,000/6 * $39.80 = $165,833.33 WIP Inventory =1000 * (39.80 + 19.60/2 + 24.5/2) = $61,850 Finished Goods Inventory = 500 * 83.90 = $41,950 Average Inventory = $269,633.33

The costs associated with carrying this average inventory is 23.5% of the total average value. Relevant Working Capital Investment Cost =
$269,633.33 * 23.5% = $63,363.83 $2.53 / bicycle

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EROSION COST
If Baldwin decides to produce Challenger bicycles, we predict that Baldwin could lose 3,000 sales of their current business. The relevant cost of erosion of the existing market is:
1982 Bike Sales = 1982 Revenue = 10,872,000/98,791 = 1982 COGS = 8,045,000/98,791 = 1982 gross Profit = 110.05 81.43 = Erosion Cost = $28.62 * 3000 = 98,791 $110.05/bike $81.43/bike $28.62/bike $85,860

*In this calculation, we did not consider the Selling & Administrative or the Income tax expense.

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RETURN ON INVESTMENT
Return on Investment (based on 25,000 sold @ $92.29)
Revenues: Sales: $92.29 * 25,000 = Costs: Manufacturing: $69.20 * 25,000 = Drawing/Supplier Non-Recurring Cost: Working Capital Investment: Erosion Cost: Total Costs: $2,307,250

$1,730,000 $5,000 (year 1 only) $63,364 $85,860 $1,879,224 per year ($1,884,224 in year 1) The return on investment can be shown by the table below: Year 1 Year 2 Year 3 $423,026 $428,026 $428,026

Deal looks profitable even at a lower margin.

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FINANCIAL POSITION
Baldwin Bicycle Company Balance Sheet
As of Dec. 31, 1982 (Thousands of Dollars)

Assets Cash AR Inventories Plant/Equipment (Net) $ $ $ $ . $ 342 1,359 2,756 3,635

Liabilities and Owners Equity AP Accrued Expenses Short-term Bank Loans Long-term Note Payable Total Liabilities Owners' Equity

8,092

$ $ $ $ $ $ $

512 340 2,626 1,512 4,990 3,102 8,092

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FINANCIAL POSITION
Income Statement
(Thousands of Dollars) For the Year Ended Dec. 31, 1982

Sales Revenues COGS GM Selling & Admin. Expenses Income Before Taxes Income Tax Expense Net Income

$ $ $ $ $ $ $

10,872 8,045 2,827 2,354 473 218 255

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FINANCIAL POSITION
SOLVENCY PERFORMANCE
Current Ratio = Current Assets / Current Liabilities = $4.457M / $3.478M = 1.28 Working Capital = Current Assets Current Liabilities = $4.457M - $3.478M = $0.979M Quick Ratio = (Cash + Short Term Investments + Receivables) / Current Liabilities = $1.701M / $3.478M = 0.49
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FINANCIAL POSITION
PROFITABILITY
ROE = Net Income / Owners Equity = $0.255M / $3.102M = 0.08 ROS = Net Income (Before Interest and Tax) / Sales = $0.473M / $10.872M = 0.04

DEBT MEASURES
Debt / Equity Ratio= Total Liabilities / Owners Equity = $4.990M / $3.102M = 1.61

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CASH FLOW
Cash Timeline (Avg.):
Days of Inventory in the Pipeline without payment = 60 days (avg.) + 30 day to receive payment = 90 days. Cash outflow associated with Pipeline Inventory: = year * 25,000 * $83.90 = $524,375

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STRATEGIC POSITION
Pro-Arguments for the Challenger Deal:
Revenue - Challenger deal would guarantee additional revenue. Diversification expands product portfolio

Con-Arguments for the Challenger Deal:

Cash Flow The Baldwin Bicycle doesnt have the cash to make the deal. Product Strategy Baldwins own brand may suffer:
Current sales will be lost to Challenger sales Retailers may drop the Baldwin line Fewer resources to market and develop their own Baldwin name-brand products
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RECOMMENDATION
Can not complete the deal due to cash flow and financial constraints. Renegotiate inventory requirement and payment schedule. Review internally to strengthen financial position.

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4 ON THE FLOOR
Quantitative alone is not sufficient Relevant Costs - Variable Begins with customer and ends with customer All about the Benjamin's ( cash flow )

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