Baldwin Bicycle Company

Topics: Marketing, Cost, Costs Pages: 19 (1161 words) Published: April 13, 2015
BB 1

Baldwin Bicycle Company
Objectives of Session
1. Practice in applying a comprehensive financial
analysis framework to a “new business” opportunity.
2. Blending strategic marketing analysis and financial
analysis.
3. Blending corporate strategy with marketing strategy
This case is an excellent one for contrasting the conventional framework (Relevant Cost Analysis) with the Superior (?) framework (SCM)

BB 2

1973—15 million bikes sold “bicycle boom” (Baldwin 135,000) 1982—10 million bikes sold (Baldwin 99,000)
Baldwin: 1982 “Structural Financial Model”
Capacity used now
Total Capacity (one shift)
Cost Structure
Fixed Mfg. (14% sales)
S&A (22% sales)
“Fixed”

98,791 units
131,721 units

$1470
$2354
$3824

Selling Price
Variable Cost
Contribution
“Variable”

Per Unit
$110
$66
$44

BB 3

“Du Pont” Model
Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity
“Margins”

“Asset
Intensity”

“Leverage” =

Shareholder
Return

255/10,872

10,872/8,092

8,092/3,102 =

255/3102

(2+%)

(1.3x)

(2.6x)

USA Average?

(8%)

BB 4

1. The Relevant Cost Analysis—6 Steps
2. The “SCM” Analysis
a.
b.
c.
d.

Basic Economics—Two ways
Balance Sheet Review—Why relevant?
Market Segmentation
Product Positioning

3. A Strategic Assessment of the Decision
4. What would you recommend?!?!

BB 5

Analysis of the Hi-Valu Proposal
1. Incremental Contribution
Revenue
Less Variable Costs
Material
Labor
Variable Overhead (40% of $24.50)

Per Unit
$92.29
$39.80
$19.60
$9.80

$69.20
$23.09

Total Incremental Contribution
(25,000 units @ $23.09) = $580,000
2. One-time Design Costs
$5,000; too small; ignore it!
QUESTION:
Can we ignore a share of “fixed” manufacturing and selling & administrative expenses?
Conventional framework says “Yes, ignore it.”

BB 6

3. Investment (no fixed assets; only working capital)
OR, Per
At Baldwin

Raw Material (2 months)
Accounts Payable Offset
(1 month assumed)
Work in Process
Finished Goods
At Hi-Valu Warehouse
(2 months)
Accounts Receivable
(1 month)

a

Commentary
Units
~4,200

OR, Per

Per Unit
$39.80

Total
$170,000

(000)
$ 160

$39.80
$54.50a
$69.20

($85,000)
$55,000
$40,000

$(120)
$ 55
$ 35

~4,200

$69.20

$290,000

$ 280

~2,100

$92.29

$190,000
$660,000

$ 185
$ 595

(~2,100)
~1,000
~500

Cost of a unit “1/2 complete” (39.80 +1/2 [19.60 + 9.80] )

BB 7

4. Carrying Costs
23.5% on Raw Material + WIP + Finished Goods
(23.5% on $470,000)

= $110,000

19.0% on Accounts Receivable
(19.0% on $190,000)

=

40,000
$150,000

$150,000 = $6 per unit

a. What rate to use?
Debt rate vs. weighted average cost of capital
Finance Cost + Non-financial Cost (tax, insurance,
obsolescence, ...)
b. The charge = rate x ∆Investment

BB 8

5. Erosion (3,000 units)
Contribution on a “regular” bike:
Sales per unit

[~$11M ÷ 99,000]

Variable cost per unit
Per Unit
Incremental Erosion costs
(3,000 units @ $44)

If Relevant—A Big If!
Type A / Type B

=

~$110

=
=

~$66
~$44

=

~$130,000

BB 9

6. Pulling the “Relevant Cost Analysis” Together
A. ROI = Profit/Investment = (580a - 130b)/660 = 450/660 = 67%!!! “Good” if P/I > K = hurdle rate
OR
B. Residual Income = 580a - 130b - 150c = ~300

“Good” if RI > 0

a. ∆Contribution Margin

25,000 x $23.+ = ~$580,000

b. “Erosion” ~ 3,000 x ~ $44 = ~ $130,000
c . The Finance Charge (per item 4 above = $150,000)

BB 10

Profit Model
PAT/SalesxSales/Assets
“Margins” “Asset
Intensity”
CURRENT: 1982

xAssets/SE=

ROE

“Leverage”

255
x 10,872 x
10,872 8,092 3,102

8,092

=

8%

4351 x 12,8722 x 8,8373 =
12,872 8,752 3,282

13%

WITH CHALLENGER

1) ∆PC of $580 - ∆Carry Cost of $150 - ∆Erosion CM of $130 = ∆$300 x ~60% = ∆$180
2) +∆$2.3M ($92 x 25,000) - ∆.3M ($110 x 3,000) = ∆$2M 3) +∆745 Working Capital...
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