Baldwin Bicycle Case Study: Strategic Cost Mangement

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Baldwin Bicycle Case Study|
Strategic Cost Managment|
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Submitted to-Mr. Suneel Maheshwari|
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By-
Sourabh Dhawan-
Nooruddin Hussain
Nimisha Rathi
Tulika Singhal
|

1. What is the relevant cost of manufacturing a challenger bike? Present Situation|  |  |  |
Total Revenue|  | 10872000|  |
Units sold|  | 98791|  |
P.U Price|  | 110.0505|  |
 |  |  |  |
 |  |  |  |
Hi Valu Proposal|  |  |  |
Material| 39.8|  |  |
Labour| 19.6|  |  |
Variable Overhead| 9.8|  |  |
Total VC| 69.2|  |  |
S.P. | 92.29|  |  |
Contribution| 23.09|  |  |
 |  |  |  |
Additional Cont| 577250|  | 577250|
 |  |  |  |
Loss Of Sales|  |  |  |
Lost unit sales| 3000|  |  |
S.P.| 110.05|  |  |
Variable Cost P.U.| 66.55|  |  |
Contribution| 43.5|  |  |
Sales Loss| 130500|  | -130500|
 |  |  |  |
 |  |  |  |
One Time Set Up Cost|  |  | -5000|
 |  |  |  |
 |  |  |  |
Net Additional revenue|  |  | 441750|

The relevant cost of producing challenger bike is 69.2 plus 5000 one time cost, this cost of 5000 is small enough to be written off in first year. On the basis of calculation made, there is an addition to the gross profit to the extent of 441750.

2. What is the “relevant” cost (on per bicycle basis) of carrying the working capital investment involved in the challenger deal?

Inventory Costs|  | yearly|  | monthly| P.U| Total| Materials|  | 25000| 2 moths| 4166.67| 39.8| 165833.5| WIP|  |  |  | 1000| 54.5| 54500|
Finished Goods|  |  |  | 500| 69.2| 34600|
Goods delivered to warehouse|  | 25000| avg 2months| 4166.67| 69.2| 288333.6| A/R 30 days|  | 25000| 30 days| 2083.33| 69.2| 144166.4| total inventory costs|  |  |  |  |  | 687433.5|  |  |  |  |  |  |  |

Additional asset Cost|  |  |  |  |  |  |
 |  |  |  |  |  |  |
Record keeping|  | 1.00%|  | 6874.335|  |  |
Inventory Insurance|  | 0.30%|  | 2062.3|  |  |
State tax|  | 0.70%|  | 4812.034|  |  |
Handling Cost|  | 3%|  | 20623|  |  |
Breakage|  | 0.50%|  | 3437.167|  |  |
Interest Expense|  | 1.5% p.m.|  | 10311.5|  |  | Add asset cost|  |  |  | 48120.34|  | 48120.34|
 |  |  |  |  |  |  |
 |  |  |  |  |  |  |
Total additional cost|  |  |  |  |  | 735553.8| Per Unit|  |  |  |  |  | 29.42215|

3. Should the challenger deal be charged for the lost sales of bikes through the regular distribution channel? If so, what is the relevant erosion charge? Challenger deal should be charged for erosion of lost sales of bike through the regular distribution channel, as it is causing a cannibalization of 3000 unit of bicycles. The revenue for these 3000 bikes is lost. As shown in calculation table above the relevant cost of such lost sales is 3000*43.5, i.e. 130500. 4. Can you estimate incremental return on investment for the challenger deal? Sales|  |  | |

Challenger| 2307250|  | |
Baldwin| 10674850|  | |
 |  | 12982100| |
Cost Of Sales|  |  | |
Material|  |  | |
Baldwin| 3603550|  | |
Challenger| 995000| 4598550| |
Labour| 2391200|  | |
Variable O/H| 1195600|  | |
Fixed O/H| 1470000|  | |
 |  | 5056800| |
Cost of sales|  | 9655350| |
Gross Margin|  | 3326750| |
S&A expense|  | 2354000| |
One time cost|  | 5000| |
Add Asset Cost|  | 155059.4| |
Income Before Tax|  | 812690.6| |
Income tax|  | 373837.7| |
Income after tax|  | 438852.9| |
| | | |
 | 1982| 1983| increment|
ROI | 7.02%| 12.05%| 0.716524|

5. What are major cash flow implications of challenger deal? In challenger deal the cash conversion cycle is increasing. As now additional units of inventory has to be maintained in the...
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