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Baldwin Bicycles

ACTG 313 O Brien


Team NUMBER SIX
Eric Falk
Jacob Griego
Vincent Sermona
Belle Wang
Shih-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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ACTG 313- Baldwin Bicyc

Hi-Valus PROPOSAL

One-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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ACTG 313- Baldwin Bicyc

MANUFACTURING COSTS

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ACTG 313- Baldwin Bicyc

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% =

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ACTG 313- Baldwin Bicyc

$63,363.83
$2.53 / bicycle

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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ACTG 313- Baldwin Bicyc

RETURN ON INVESTMENT
Return on Investment (based on 25,000 sold @ $92.29)
Revenues:
Sales: $92.29 * 25,000 = $2,307,250
Costs:
Manufacturing: $69.20 * 25,000 =
$1,730,000
Drawing/Supplier Non-Recurring Cost:
$5,000 (year 1 only)
Working Capital Investment:
$63,364
Erosion Cost:
$85,860
Total Costs:
$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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ACTG 313- Baldwin Bicyc

FINANCIAL POSITION

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ACTG 313- Baldwin Bicyc

FINANCIAL POSITION

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ACTG 313- Baldwin Bicyc

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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