Baldwin Bicycle Company

1
Baldwin Bicycle Company

• Analysis of Case 26-5
• Bryan Jerrett
• Louise Krogh
• Sherrie Reynolds
• Nov. 9 2005

2
Overview

• Synopsis of case
• Definition of Problem
• Possible Alternative Solutions
• Evaluation of Quantitative Factors
• Evaluation of Qualitative Factors
• Recommendations

3
Synopsis of Case

• Baldwin Bicycle Company (BBC) has been making
  above average bicycles for almost 40 years
• Hi-Valu Stores Inc. (HVS) has approached BBC to
  produce a house-brand of bicycles for them
• Hi-Valu wants the Challenger to look different
  and cost less than Baldwins regular line
• Preliminary financial analysis of the proposal is
  needed

4
Problem Statement

• The Hi-Valu offer represents a chance for BBC to
  increase production capacity but at a greater
  cost per unit than its current product.

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Alternative Solutions

• Because the quantity and buying price put forth
  by Hi-Valu are non-negotiable and assuming that
  laying off the excess capacity is not a
  possibility the number of alternatives are
  limited
• Reject the proposal/maintain status-quo
• Accept the proposal

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Quantitative Factors

• In conducting preliminary financial analysis
  Suzanne Leister must consider quantitative
  elements in order to determine which alternative
  would be most financially beneficial to BBC
• These include
• Differential revenues
• Differential costs
• Cost of sales one-time costs asset-related
  costs tax expenses
• Differential profit

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Balance Sheets
Base case balance sheet Alternative balance
sheet
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Income Statements
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Differential Revenues

• Differential revenues those revenues that are
  different under one set of conditions than they
  would be under another
• Conduct a comparison of the projected revenues
  for the base case scenario (reject proposal) and
  the alternative scenario (accept proposal)

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Differential Revenues

• Reject Proposal
• Projected sales
• 100000 bikes
• Unit price
• 110.05
• Sales revenue
• 11005051

• Accept Proposal
• Projected sales
• 97000 Baldwin
• 25000 Challenger
• Unit price
• 110.05
• 92.29
• Sales revenue
• 12982150

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Differential Costs

• Differential costs those costs that are
  different under one set of conditions than they
  would be under another
• Conduct a comparison of the projected costs for
  the base case scenario (reject proposal) and the
  alternative scenario (accept proposal)

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Differential Costs

• Reject Proposal
• Unit cost
• 81.43
• Cost of sales
• 8143454
• Income tax expense
• 233945

• Accept Proposal
• Unit cost
• 81.43 Baldwin
• 83.90 Challenger
• Cost of sales
• 9996651
• Asset-related costs
• 95379
• Income tax expense
• 244787

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Questions 1-4

• What is the expected added profit from the
  Challenger line
• What is the expected impact of cannibalization of
  existing sales
• What costs will be incurred on a one-time basis
  only
• What are the additional assets and related
  carrying costs

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Differential Profit (Year 1)

• Revenue Total Costs Profit
• Reject Proposal 273652
• Accept Proposal 286333
• Difference 12681
• By accepting the proposal BBC stands to make
  12681 more than by maintaining the status-quo

15
Differential Profit (Years 2 3)

• Three year contract between BBC and HVS
• One-time costs of 5000 are incurred by BBC in
  year one
• Profit from yrs. 2 and 3 increases from yr. 1
  by 2696 resulting in a total differential
  profit of 15377
• Expenses Income Before Taxes Income Tax
  Expense

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Cannibalization

• Cannibalization to deprive of vital elements or
  resources such as personnel equipment or
  funding for use elsewhere
• The impact of cannibalization is the 3000 less
  Baldwin bikes expected to be sold plus the
  uncertainty of the success of the Challenger line
  of bikes

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One-time Costs

• The one time costs that are incurred are the
  5000 associated with the preparations of
  drawings and designs and procuring sources for
  fenders seats handlebars tires and shipping
  boxes

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Assets and Carrying Costs

• The additional assets are the increases in
  inventories and receivables associated with the
  addition of the production of the Challenger line
• The increase in inventory is 269633 and the
  increase in receivables is 247138
• The added carrying costs are 23 of added
  inventories and 13.5 of added receivables which
  amount to 62015 for inventories and 33364 for
  receivables

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Question 5

• What is the overall impact on the company in
  terms of (a) profits (b) return on sales (c)
  return on assets and (d) return on equity

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Ratio Analysis
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Qualitative Factors

• A decision cannot be based solely on numerical
  analysis
• While numbers may appear favourable it is
  imperative to consider the unmeasurable factors

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Qualitative Factors

• While calculations are useful in narrowing down
  alternatives that should be considered
  qualitative analysis assists in making the final
  judgement
• For each alternative there are associated risks
  and rewards

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Question 6

• What are the strategic risks and rewards

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Reject Proposal

• Risks
• BBC may face continually declining sales due to a
  poor economy
• BBC will continue to produce at only 75
  production capacity

• Rewards
• Maintain loyalty from current distributors
• Maintain 40-year reputation for above average
  quality and price

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Accept Proposal - Risks

• Current dealers may drop Baldwin line
• Current dealers may request a similar product
  (Challenger)
• Loss of street cred
• Putting faith in a new product

• BBC may find itself with an abundance of
  Challenger-specific inventory
• Extra costs may result in having to use cheaper
  materials

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Accept Proposal - Rewards

• With Challenger line BBC will be producing at a
  higher capacity
• Greater penetration of the market through new
  market segments

• If Baldwin name is not on the Challenger bike
  BBCs reputation may not be damaged
• Strong Challenger sales may balance weak Baldwin
  sales

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Question 7

• What should the company do and why

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Recommendations

• Because there is a lack of research conducted
  regarding the new Challenger line uncertainties
  exist as to how it will fare in the market
• However because of the poor state of the economy
  accepting the proposal from HVS is a good idea
  for BBC
• Raise production capacity from approx. 75 to
  approx. 97
• Increase in Challenger sales could offset
  decreasing Baldwin sales

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Recommendations

• The condition of the economy is unlikely to
  improve in the short term therefore taking a
  risk on a three year contract that projects
  favourable sales promises a better situation than
  they are currently facing
• Based on the information given Baldwin Bicycle
  Company should accept Hi-Valus proposal

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Thank You!