By: Group 8

Relevant cost of manufacturing Challenger

Item Material Labor Overhead (Only variable) Total per unit cost Units Opportunity cost Total =(2.827*1000000*3000)/98791 Per unit cost 39.8 19.6 9.8 69.2

25000 =85848
=1815848+5000* =1820848

The relevant cost will include the opportunity cost also as there will be loss of sales (Cannibalization)
* Cost incurred in preparing drawings etc.

Relevant cost of carrying the working capital

investment
Item Raw Material WIP Finished Goods Holding period costs Cost =39.8*(25000/12)*2 = 165833 = 39.8*1000 + (14.7+9.8)*1000/2 = 52050 = 500 * 69.2 = 34600 = 25000*2*69.2/12 = 288333 = 2083*92.29 = 192240

Charged for the lost sales of bikes through regular distribution channel or not?
As calculated for question 1, the opportunity cost due to lost sales of the standard model = $85848
Yes, the company should be charged for it.

Incremental return on investment

Challenger Revenues COGS Asset related Costs One time cost 25000*92.29 25000*69.2 254933*(0.18+0.055) Cannibalized sales -3000*10872000/98791 -3000*8045000/98791 +480604*0.18 Incremental 1977100 (1485696) (146418) (5000)

Net incremental return

294455

Major cash flow implications

If we go for the deal, net cash inflow of $294455
If we forego the deal, 100000 bikes will be sold in the next 3 years Incremental sales = 100000 -98791 = 1209 Incremental cash = 294455 1209*2827000/98791 = 259858

Baldwins strategic position at the end of 1982

If we go for the deal,
Better cash generation Better product portfolio Cannibalization of its own brand

Retailers may break supply chain for Baldwin

Company doesnt have enough cash to make the deal

Although the company can manage its inventories and other costs

Thus, the deal is NOT a strategic fit for the company