BALDWIN CASE ANALYSIS

CMA Assignment

NOVEMBER 1, 2013
KANUPRIYA CHAUDHARY (#031)

Case Analysis of Baldwin Bicycle Company

1. What is the expected added profit from the Challenger line? 2. What is the expected impact of cannibalisation? 3. What costs will be incurred on a one-time basis only? 4. What are the additional assets and related carrying costs? 5. What is the overall Impact on the Company in terms of a. Profit b. Return on Sales c. Return on Assets d. Return on equity. 6. What are the strategic Risks and Rewards? 7. What should the company do and why?

Answers: 1. The profit procured from selling Challenger is: Challenger's bike Selling price/unit Materials Direct Labour cost Overhead Total Cost Less: Fixed OH rate Relevant cost/unit Contribution margin/unit No. of bikes produced/year Operating profit $92.29 39.80 19.69 24.50 83.90 14.70 69.20 23.09 25000 577250

By producing Challengers, the estimated Revenue will be $577250.00

2. The expected amount of cannibalization is: Baldwin's Bikes Selling/unit (10872000/98791) 110.05 Cost/unit (8045000/98791) 81.43 Less: OHR/unit 24.5*0.60 14.70 Variable cost/unit 66.73 Contribution/unit 43.32

No. of units Lost Estimated loss

3000 129960

3. a. Cost of preparing drawings b. Arranging sources for fenders, c. Seats, Handlebars, Tyres d. Shipping Boxes (not the same as Baldwin's model) The above in total costs about $5000. These are just onetime costs.

4. Additional Assets and related Carrying cost:( In $) Assets related Costs- Challenger Materials 25000/(12*2*39.80) Work in Progress 1000*39.80 Finished goods 500*39.80 Total Additional Inventory Rate as to peso value 0.23 Additional costs for receivables Accounts receivable 25000*92.29/12 Rate as to Peso value 0.135 Total additional related cost 5. a. Profit: Additional Revenues One-time Costs Additional Assets related costs Loss on Cannibalization Income before tax ITR of 46% Estimated Additional Net Income b. Return on Sales: 577250 5000 82901 129960 359389 165318.94 194070.06 asset 165833.49 39800 41950 247583.47 5694.20 192270.83 25956.56 82900.76

Return on sales = Net Income/ Sales; ROS = $ 194,070/2,307,250 ROS = 0.08 c. Return on Assets : Return on Assets= Net Income/ Average Assets

= $ 194,070.00/ (8,092,000+ 439,854)*2 ROA= 0.05 d. Return on Equity: ROE = Net Income/Equity Since Assets = Liabilities + Expenses and Increase in Assets = Increase in Equity ROE = $197,080/439,854 = 0.44

6. The risks involved if they accept the proposal are additional competition with the Challenger, Current dealers might drop out. The Rewards on other side if they accept the proposal would be full utilization of the plant, Opportunity to supply to department store chains.

7. Although numbers are just a guide to the overall impact, accepting the proposal of Hi-Valu will be good for the company as it will provide additional revenue for Baldwin for the next 3 years. Further, this is a good opportunity for Ms. Leisters company to finally enter the mainstream market or department store chains like Hi-Valu. They may initially be suppliers to chains, Baldwin could later on push to have their own branded products in department stores.