Baldwin Bicycles

1
Baldwin Bicycles

• ACTG 313 O Brien
• Team NUMBER SIX
• Eric Falk
• Jacob Griego
• Vincent Sermona
• Belle Wang
• Shih-hao Wang

2
BALDWINS HISTORY

• American bicycle industry was volatile in 70s.
• Baldwins sales are through independently owned
  retailers and bicycle shops.
• Baldwins product image Above average Not
  top-of-the-line.
• Currently, Baldwin operates its plant at about
  75 of one-shift capacity.
• 1982 Sales were 98,791 bikes (10.8M) but have
  decreased in the past 2 years.

3
Hi-Valus PROPOSAL

• One-time Design Costs 5,000
• Unit Price for Baldwin 92.29 (Average)
• Volume 25,000 bikes a year
• Impact on Baldwins Sale Lose 3,000 units
  annually
• Hi-Valu will pay for a bike when its shipped
  from the warehouse to retail store

4
MANUFACTURING COSTS
5
WORKING CAPITAL INVESTMENT COST

• Average Inventory Assumptions
• Raw Materials Inventory (two month supply)
  25,000/6 39.80 165,833.33
• WIP Inventory 1000 (39.80 19.60/2 24.5/2)
  61,850
• Finished Goods Inventory 500 83.90
  41,950
• Average Inventory 269,633.33
• The costs associated with carrying this average
  inventory is 23.5 of the total average value.
• Relevant Working Capital Investment Cost
  269,633.33 23.5 63,363.83
• 2.53 / bicycle

6
EROSION COST

• If Baldwin decides to produce Challenger
  bicycles, we predict that Baldwin could lose
  3,000 sales of their current business.
• The relevant cost of erosion of the existing
  market is
• 1982 Bike Sales 98,791
• 1982 Revenue 10,872,000/98,791
  110.05/bike
• 1982 COGS 8,045,000/98,791 81.43/bike
• 1982 gross Profit 110.05 81.43
  28.62/bike
• Erosion Cost 28.62 3000 85,860
• In this calculation, we did not consider the
  Selling Administrative or the Income tax
  expense.

7
RETURN ON INVESTMENT

• Return on Investment (based on 25,000 sold _at_
  92.29)
• Revenues
• Sales 92.29 25,000 2,307,250
• Costs
• Manufacturing 69.20 25,000 1,730,000
• Drawing/Supplier Non-Recurring Cost 5,000
  (year 1 only)
• Working Capital Investment 63,364
• Erosion Cost 85,860
• Total Costs 1,879,224 per year
• (1,884,224 in year 1)
• The return on investment can be shown by the
  table below
• Year 1 Year 2 Year 3
• 423,026 428,026 428,026
• Deal looks profitable even at a lower margin.

8
FINANCIAL POSITION
9
FINANCIAL POSITION
10
FINANCIAL POSITION

• SOLVENCY PERFORMANCE
• Current Ratio Current Assets / Current
  Liabilities
• 4.457M / 3.478M
• 1.28
• Working Capital Current Assets Current
  Liabilities
• 4.457M - 3.478M
• 0.979M
• Quick Ratio (Cash Short Term Investments
  Receivables) / Current Liabilities
• 1.701M / 3.478M
• 0.49

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FINANCIAL POSITION

• PROFITABILITY
• ROE Net Income / Owners Equity
• 0.255M / 3.102M
• 0.08
• ROS Net Income (Before Interest and Tax) /
  Sales
• 0.473M / 10.872M
• 0.04
• DEBT MEASURES
• Debt / Equity Ratio Total Liabilities / Owners
  Equity
• 4.990M / 3.102M
• 1.61

12
CASH FLOW

• Cash Timeline (Avg.)
• Days of Inventory in the Pipeline without payment
  60 days (avg.) 30 day to receive payment 90
  days.
• Cash outflow associated with Pipeline Inventory
  ¼ year 25,000 83.90 524,375

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STRATEGIC POSITION

• Pro-Arguments for the Challenger Deal
• Revenue - Challenger deal would guarantee
  additional revenue.
• Diversification expands product portfolio
• Con-Arguments for the Challenger Deal
• Cash Flow The Baldwin Bicycle doesnt have the
  cash to make the deal.
• Product Strategy Baldwins own brand may
  suffer
• Current sales will be lost to Challenger sales
• Retailers may drop the Baldwin line
• Fewer resources to market and develop their own
  Baldwin name-brand products

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RECOMMENDATION

• Can not complete the deal due to cash flow and
  financial constraints.
• Renegotiate inventory requirement and payment
  schedule.
• Review internally to strengthen financial
  position.

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4 ON THE FLOOR

• Quantitative alone is not sufficient
• Relevant Costs - Variable
• Begins with customer and ends with customer
• All about the Benjamin's ( cash flow )