Baldwin Cycle Case

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Baldwin Cycle Case

1.Relevant Cost:
Direct Material$39.8
Direct Labor$19.6
Variable Overhead(@40% of $24.5)$9.8
Total Relevant Costs$69.2

2.
2-months Raw material for 25,000 bikes @ $38.9$165,833
WIP Inventory(1000 @ $69.2)$69,200
Finished Goods(500 @ $69.2)$34,600
A/R (30 days) @(25,000/12*92.29)$192,270
Total Inventory Costs$461,904
Relevant Asset Cost (@5.5 %) $25,405
Total Relevant Asset Cost$487,309
Interest @ 18%$87,716
Net Relevant Cost$399,593
Price Per Bicycle$15.98

3.Cannibalization or erosion will arguably lead to reduction in Baldwin’s revenue. The lost sales amount to $1.3 Million. However, if the challenger bikes are not introduced fearing impacts of cannibalization or erosion, Baldwin’s competitor can step in and claim the benefits. Hi-Valu can turn to Baldwin’s competitor and that can have a larger and long-term effect on an already declining bicycle market share for Baldwin. 4.It is difficult to predict return as implementation of this deal opens up uncertainty in retaining existing customers. 5.The current inventory turnover rate is 125 days for Baldwin and 46 days for account receivable turnover. However, Hi-Valu will pay Baldwin in 30 days resulting in early cash realization. The deal also positively impacts inventory turnover by limiting it to 120 days. Thus the deal has a favorable impact on Baldwin Cash flows. 6.Baldwin’s financial situation is as follows:

a.High debt to equity ratio from high amount of short-term debt b.High debt can lead to problems in raising additional financing c.From the current ratio(1.28), it seems that Baldwin can pay of its liabilities d.With an 8.2% ROE, Baldwin has a lower ROE than the industry average 7.Baldwin isn’t well poised at end of 1982 for the following reasons: a.Bicycle boom has flattened out resulting the plant operating capacity to be underutilized at 75% b.Challenger deal provides added capacity for a guaranteed 3 years with additional scope on...
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