Baldwin Bicycle Company 1 The Relevant Cost of

Baldwin Bicycle Company

1. The ”Relevant” Cost of Manufacturing a Challenger Bike • The relevant cost to manufacture a Challenger Bike includes material, labor and the variable production cost: – – Material: 39, 80 $ Labor: 19, 60 $ Variable overhead (40% x all overheads 24, 50): 9, 80 $ Total variable costs: 69, 20 $ / kpl • Additional contribution per unit: 92, 29 – 69, 20 = 23, 09 $ • Additional contribution total: 25000 x 23, 09 = 577250 $

2. The ”relevant” cost of carrying Working Capital Investments • Average inventory: – Material: 25000 x 2/12 x 39, 80 = 165833, 33 – WIP: 1000 x (39, 80 + 19, 60 x 6/12 + 24, 50 x 6/12) = 61850 – Finnished products: 500 x 83, 90 = 41950 – Total: 269633, 33 $ • Percentage of relevant costs: 23, 5% – Total: 23, 5% x 269633, 33 = 63363, 83 – Per unit: 63363, 33 / 25000 = 2, 53 $

3. The ”relevant” erosion costs • If Baldwin accets the deal, it will lose 3000 units of regular bike sale. • The relevant cost of erosion is the contributions margin • Sales revenue per unit (year 1982): 10872000 / 98791 units = 110, 05 $ per unit • Costs per unit: 8045000 / 98791 = 81, 43 $ • Contribution margin per unit: 28, 62 • Erosion cost: 3000 x 28, 62 = 85860 $

4. ROI • Revenue: 25000 x 92, 29 = 2307250 $ • Costs: – Costs of goods sold: 25000 x 69, 20 $ = 1730000 $ – One time added costs: 5000 $ – Working capital investment: 63363, 83 $ – Erosion cost: 85847, 90 $ – Total cost: 1884211, 73 $ • Profit: 2307250 – 1884211, 73 = 423038, 27 $ • ROI: 423038, 27 / 1884211, 73 = 22, 45 %

5. Kassavirta • On awerage a bike will remain two months in warehouse. • Payment follows in 30 days when the bioke is sold. • Cash inflow, 4 times in a year = 92, 29 $ x 25000 unit / 4 = 576812, 5 $ • Cash outflow: 25000 units x 83, 90 $ x 3/12 = 524375 $ • Cash account: 342000 $

6. Financial situation Return on equity: 255000 / 3102000 = 0, 08 Return on sale: 255000 / 10872000 = 0, 02 Return on assets: 255000 / 8092000 = 0, 03 Liability to equity ratio: 4990000 / 3102000 = 1, 61 • Current ratio: (342000 + 1359000 + 2756000) / (512000 + 340000 + 2626000) = 1, 28 • •

7. Strategic position • Sensitivity analysis needed – Different volumes • Risk analysis needed – Current dealers, additional competition, future of the market, price volatility • Assumptions, not told in the case: – Different bikes/ models, different product mix etc.