Last Updated 26 Jan 2021

Baldwin Cycle Case

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Baldwin Cycle Case

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.

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  • It is difficult to predict return as implementation of this deal opens up uncertainty in retaining existing customers.
  • 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.

Baldwin’s financial situation is as follows:

  • High debt to equity ratio from high amount of short-term debt
  • High debt can lead to problems in raising additional financing
  • From the current ratio(1. 28), it seems that Baldwin can pay of its liabilities
  • With an 8. 2% ROE, Baldwin has a lower ROE than the industry average 7.
  1. Baldwin isn’t well poised at end of 1982 for the following reasons:
  2. Bicycle boom has flattened out resulting the plant operating capacity to be underutilized at 75%
  3. Challenger deal provides added capacity for a guaranteed 3 years with additional scope on a yearly contact basis
  4. Baldwin could lose sales of 3000 units and loss of current dealers due to the deal Based on long-term prospect of losing 3000 units of sales and current dealers, Baldwin should reject the deal unless some revisions to the deal are presented.

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