baldwin bicycles

Baldwin BicyclesBaldwin Bicycles

ACTG 313 – O’ BrienACTG 313 – O’ BrienTeam NUMBER SIXTeam NUMBER SIX

Eric FalkEric FalkJacob GriegoJacob Griego

Vincent SermonaVincent SermonaBelle WangBelle Wang

Shih-hao WangShih-hao Wang

04/07/2304/07/23 ACTG 313- Baldwin Bicycle CompanyACTG 313- Baldwin Bicycle Company 22

BALDWIN’S HISTORYBALDWIN’S HISTORY

• American bicycle industry was volatile in 70’s.• Baldwin’s sales are through independently

owned retailers and bicycle shops.• Baldwin’s 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.


Hi-Valu’s PROPOSALHi-Valu’s PROPOSAL

• One-time Design Costs: $5,000• Unit Price for Baldwin: $92.29 (Average)• Volume: 25,000 bikes a year• Impact on Baldwin’s Sale: Lose 3,000 units

annually• Hi-Valu will pay for a bike when it’s shipped

from the warehouse to retail store


MANUFACTURING COSTSMANUFACTURING COSTS

Total RelevantMaterials 39.80$ 39.80$ Labor 19.60$ 19.60$ Overhead (@125% of labor) * 24.50$ 9.80$

Total 83.90$ 69.20$ *: 40% of total production overhead cost is variable.

Estimated 1st-Year Costs


WORKING CAPITAL WORKING CAPITAL INVESTMENT COSTINVESTMENT 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


EROSION COSTEROSION 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 = 98,7911982 Revenue = 10,872,000/98,791 =

$110.05/bike1982 COGS = 8,045,000/98,791 = $81.43/bike1982 gross Profit = 110.05 – 81.43 = $28.62/bikeErosion Cost = $28.62 * 3000 = $85,860

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


RETURN ON INVESTMENTRETURN ON INVESTMENT

• Return on Investment (based on 25,000 sold @ $92.29)Revenues:

Sales: $92.29 * 25,000 = $2,307,250Costs:

Manufacturing: $69.20 * 25,000 = $1,730,000Drawing/Supplier Non-Recurring Cost: $5,000 (year 1 only)Working Capital Investment: $63,364Erosion Cost: $85,860Total 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.


FINANCIAL POSITIONFINANCIAL POSITION

Assets Liabilities and Owners Equity

Cash 342$ AP 512$ AR 1,359$ Accrued Expenses 340$

Inventories 2,756$ Short-term Bank Loans 2,626$ Plant/Equipment (Net) 3,635$ Long-term Note Payable 1,512$

Total Liabilities 4,990$ . Owners' Equity 3,102$

8,092$ 8,092$

Baldwin Bicycle Company Balance Sheet

As of Dec. 31, 1982 (Thousands of Dollars)



Sales Revenues 10,872$ COGS 8,045$

GM 2,827$ Selling & Admin. Expenses 2,354$

Income Before Taxes 473$ Income Tax Expense 218$

Net Income 255$

(Thousands of Dollars)

For the Year Ended Dec. 31, 1982

Income Statement


FINANCIAL POSITIONFINANCIAL POSITIONSOLVENCY 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



PROFITABILITYROE = 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 MEASURESDebt / Equity Ratio= Total Liabilities / Owner’s Equity

= $4.990M / $3.102M= 1.61


CASH FLOWCASH 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: = ¼ year * 25,000 * $83.90 = $524,375


STRATEGIC POSITIONSTRATEGIC 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 doesn’t have the

cash to make the deal.– Product Strategy – Baldwin’s 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


RECOMMENDATIONRECOMMENDATION

• Can not complete the deal due to cash flow and financial constraints.

• Renegotiate inventory requirement and payment schedule.

• Review internally to strengthen financial position.


4 ON THE FLOOR4 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 )

baldwin bicycles

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