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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
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MANUFACTURING COSTS
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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
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$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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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
FINANCIAL POSITION
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FINANCIAL POSITION
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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
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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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