Baldwin Bicycle
Case Summary:
Baldwin Bicycle Company has long history in manufacturing bicycles. Currently, they receive a Challenger deal from Hi-Valu. This proposal contains some special requirements such as to have larger inventory, sell at lower price, and have “Challenger” name on bicycle tires. Suzanne Leister, marketing vice president of Baldwin Bicycle Company, is considering whether or not to accept this proposal. The issues are listed below:
The Relevant Cost of Manufacturing a Challenger Bike | Cost analysis | The Relevant Cost of Working Capital Investments | Relevant cost analysis | The Relevant Erosion Charge | Profit analysis | The Incremental Return on Investment | Ratio analysis; incremental ROI | The Major Cash Flow Implication | Inventory analysis | Baldwin’s Financial Situation at the end of 1982 | Financial ratio analysis | Baldwin’s Strategic position at the end of 1982 | Strategic analysis |
1. The “Relevant” Cost of Manufacturing a Challenger Bike
The relevant cost to manufacture a Challenger bike includes the material, labor and the variable production overhead cost. As shown in Exhibit 2 (1), the variable production overhead is about 40 percent of total production overhead, which is $24.50. Even though there is a One-time added costs about $5,000, it is not included because it is the sunk cost that occurs for only once, and regards as an irrelevant cost to produce each unit of bike. The table below shows that the total relevant cost is $69.20.
Materials | $39.80 | Labor | $19.60 | Variable Overhead | $9.80 | Total Variable Cost [40%*24.50] | $69.20 |
2. The “Relevant” Cost of Carrying the Working Capital Investments
The relevant cost of carrying the working capital investment is the variable cost of any added assets in producing the Challenger bikes. The only additional asset is the added inventories in the Exhibit 2 (5). It includes the raw materials, working in process bikes and
Baldwin Bicycle Company has long history in manufacturing bicycles. Currently, they receive a Challenger deal from Hi-Valu. This proposal contains some special requirements such as to have larger inventory, sell at lower price, and have “Challenger” name on bicycle tires. Suzanne Leister, marketing vice president of Baldwin Bicycle Company, is considering whether or not to accept this proposal. The issues are listed below:
The Relevant Cost of Manufacturing a Challenger Bike | Cost analysis | The Relevant Cost of Working Capital Investments | Relevant cost analysis | The Relevant Erosion Charge | Profit analysis | The Incremental Return on Investment | Ratio analysis; incremental ROI | The Major Cash Flow Implication | Inventory analysis | Baldwin’s Financial Situation at the end of 1982 | Financial ratio analysis | Baldwin’s Strategic position at the end of 1982 | Strategic analysis |
1. The “Relevant” Cost of Manufacturing a Challenger Bike
The relevant cost to manufacture a Challenger bike includes the material, labor and the variable production overhead cost. As shown in Exhibit 2 (1), the variable production overhead is about 40 percent of total production overhead, which is $24.50. Even though there is a One-time added costs about $5,000, it is not included because it is the sunk cost that occurs for only once, and regards as an irrelevant cost to produce each unit of bike. The table below shows that the total relevant cost is $69.20.
Materials | $39.80 | Labor | $19.60 | Variable Overhead | $9.80 | Total Variable Cost [40%*24.50] | $69.20 |
2. The “Relevant” Cost of Carrying the Working Capital Investments
The relevant cost of carrying the working capital investment is the variable cost of any added assets in producing the Challenger bikes. The only additional asset is the added inventories in the Exhibit 2 (5). It includes the raw materials, working in process bikes and