BB 1

Baldwin Bicycle Company

Dr Ashish Varma
Ph.D, FICWA, PGDBM
Assistant Professor
Accounts and Finance
IMT, Raj Nagar
Ghaziabad.

Email: avarma@imt.edu,
sir_ashish@rediffmail.com
 BB 2

“Du Pont” Model

Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity

“Margins” “Asset “Leverage” = Shareholder

Intensity” Return

255/10,872 10,872/8,092 8,092/3,102 = 255/3102

(2+%) (1.3x) (2.6x) (8%)

We should look at the industry average too!!!

 BB 3

Analysis of the Hi-Valu Proposal

1. Incremental Contribution
Per Unit
Revenue $92.29
Less Variable Costs
Material $39.80
Labor $19.60
Variable Overhead (40% of $24.50) $9.80 $69.20
$23.09
Total Incremental Contribution
(25,000 (units exhibit 2 : pt.3) @ $23.09) = $580,000

2. One-time Design Costs

$5,000; too small; ignore it!

.
.
.
 BB 4

3. Investment (no fixed assets; only working capital)

At Baldwin

Units Per Unit Total

Raw Material (2 months 25000/ 12 X 2)) ~4,200 $39.80 $170,000
Accounts Payable Offset
(1 month assumed) (~2,100) $39.80 ($85,000)
Work in Process ~1,000 $54.50a $55,000
Finished Goods ~500 $69.20 $40,000
At Hi-Valu Warehouse
(2 months) ~4,200 $69.20 $290,000
Accounts Receivable
(1 month) ~2,100 $92.29 $190,000
$660,000

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

 BB 5

4. Carrying Costs

23.5%( ref exhibit 2 pt. 4) on Raw Material + WIP + Finished Goods

(23.5% on $470,000 ie ( 85 +55 + 40 +290 )) = $110,000

and 19.0% on Accounts Receivable

(19.0% on $190,000) = 40,000

$150,000

$150,000 = $6 per unit for 25000 bikes

 BB 6

5. Erosion (3,000 units)

Contribution on a “regular” bike:

Sales price per unit[~$11M ÷ 99,000] = ~$110

Variable cost per unit = ~$66

Per Unit = ~$44

Incremental Erosion costs

(3,000 units @ $44) = ~$130,000

.
.
.
 BB 7

6. Pulling the “Relevant Cost Analysis” Together

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 8
Profit Model

PAT/Sales x Sales/Assets x Assets/SE = ROE

“Margins” “Asset “Leverage”

Intensity”
CURRENT: 1982

255 x 10,872 x 8,092 = 8%

10,872 8,092 3,102
 BB 9

WITH CHALLENGER

4351 x 12,8722 x 8,8373 = 13%

12,872 8,752 3,282

1) $580 - Carry Cost of $150 - Erosion of $130 = $300 x ~60% = ∆$180

( OLD PAT 255 + ADDITIONAL PAT 180 = 435 )

( 40% are fixed ie fixed manufacturing 14% and selling expenses 21%)

2) +$2.3M ($92 SELLING PRICE PER BIKE x 25,000 BIKES) - ∆.3M ($110 SELLING PRICE PER
ORIGINAL BIKE x 3,000 UNITS CANNIBALIZED) = ∆$2M

10872 + 2M = 12872

3) 8092 + 660 ADDITIONAL INVESTMENTS IN WORKING CAPITAL = 8752

3) + 85 Working Capital Assets IF NO ACCOUNTS PAY ABLE INCREASE

5) 3102 + 180 ADDITIONAL PAT = 3282

 BB 10

COST OF CAPITAL

18 % PRE TAX

POST TAX ?

WHAT HAPPENS TO THIS 13% ROI WHEN THE

SALES DROP ( NOT ONLY THE 3000
CANNABALIZED BUT FROM THE REMAINING LOT
OF 98,000 DUE TO THE ANGER OF THE
DISTRIBUTORS???)

WOULD BALDWIN BE HAPPY MATCHING THE COST

OF CAPITAL OR SHOULD IT WANT TO EXCEED
THE COST OF CAPITAL ?
 BB 11

Note :

A discounted cash flow analysis will be better :

However refining the calculation will not change

the basic message that the HV deal is attractive
in the short run.

Therefore range
OLD RANGE: 7 TO 9%
NEW RANGE: 12 TO 14 %
 BB 12

Should Baldwin be happy with this 13%?

Why ?............................................................

Why Not ?.....................................................

 BB 13

Conventional Pro

• Incremental profit and incremental ROI excellent

(even with erosion).
• The existing business covers the fixed costs (i.e.
we are showing profits in 1982). The “Incremental”
business need only show positive marginal
contribution.
• We have excess capacity and volume isn’t
growing.
 BB 14

Conventional Pro
( cont.)
• Opens up a new (for Baldwin) and more stable
distribution channel (Hi Value).
• Opens up a new market segment for growth for
Baldwin (The “Discount Retail” segment”).
• Risk seems low (or does it?!).
 BB 15

Cons

• Can we really look at a deal on an “incremental”

basis when it covers 25% of volume and runs for at
least 3 years??!!
• On a full cost basis, not attractive
• Lousy ROE ( 8% ) now; Even with the H/V deal, the
ROE is still not good ( 13% );
 BB 16

CONS•
• Creates a major cash crunch; Highly leveraged
now; No debt capacity left; How to finance the
incremental investment?
• Inventory at H/V may run up to average 4
months, not 2 months; Implications for ROI,
cash flow, and financing?
• Additional sales losses, if current dealer’s drop
Baldwin line?
• A very sweet deal for H/V; Can we negotiate a
better deal? (probably yes; should we try?)
 BB 17

Tolerate terms of HV
Is it wise to tie up unused excess capacity, unused it may
be currently, for several years at well below normal
prices.

What if HV takes fewer than 25000 bikes or asks for more

than 25000 bikes?

Source of funding; given the high short term debt of $ 2.6

million at the year end.

Also the production for the Christmas would be shipped out

by now, and the build up for spring wouldn’t have started,
then why such high inventory ? 2.7 inventory for a 10.8
sales means a inventory carrying days of 120. This slow
moving inventory is financed with short term debt.
 BB 18

BALDWIN: 1982

Balance Sheet

Cash $342 A/P + Accruals $852

A/R $1,359 Bank Borrowing $2,626
Inventory (123 days)* $2,756 LTD $1,512
Fixed Assets $3,635 SE $3,102
$8,092 $8,092
 BB 19

The “Positioning” Issue

Selling 2 “similar”(?) products at different prices
through
different channels to the same (?) customers

Is this H/V deal “good business”?

I. Normal Channel: Delivered cost $110 + $10

(transportation) plus retail markup @ 40% on selling
price
Selling Price = $200

II. H/V: Delivered cost $92 + $8 (transportation) plus

retail markup @ 25% on selling price
Selling Price = $133
 BB 20

Is the $67 difference in price ($133 vs. $200)

reflective of a difference in “value” to the
customer?

Brand Image
Dealer Image
Free Assembly
Service
Point of Sale Merchandising

NOTE WE ARE NOT ANALYSING FROM THE HI VALUE COMPANY PERSPETIVE.

 BB 21

A comparison between old positioning and new

planned positioning ( if any )?

Should the company really look at discount

department stores ?

Also its probably reasonable to assume that HV will

find someone else to make the challenger bike and
that Baldwin sales will drop regardless of what
decision Baldwin takes. Thus sales are lost when
Challenger enters the market, regardless of
Baldwins actions.

How many other bicycle producers have so much

spare capacity ?
 BB 22

PREMIUM BIKE
$ 300 , Sold through bike stores, eg Fuji, Trek etc

VALUE BIKE
$ 200 TO $150, Sold through hardware,toys,
department stores., Ross, Columbia, Baldwin

LOW PRICE BIKE

$ 100+, Sold through discount chains, Generic
brands, Distress stock.
 BB 23

Baldwin: Background
• Currently profitable, but only modestly so (ROE 8%)

• Heavily leveraged ; New source of money ????

• Their old strategic niche is eroding away, slowly but surely,

from “above” and “below”

• Sales volume decreasing during last 2 years

• A “solution” presents itself in the H/V offer

Is it a good “solution”?
 BB 24

• What is Baldwin’s strategic niche currently? Does it matter if they

stray from that?

• Can we be a significant supplier simultaneously in two price

segments with a substantially “identical” product?

• How to implement diverse strategies (low cost and differentiation)

within the same firm? The selling and distribution costs seems to
be very high for a low margin manufacturer.

• Avoid “stuck-in-the-middle”

Baldwin will be very vulnerable to Hi valu’s dictatorship once the offer

is accepted. Is this acceptable to Baldwin ?
 BB 25

Is it that by accepting the HV deal, Baldwin is creating yet

another direct competitor and is offering that competitor better
price than what it offers to its regular customers.

This does not seem to be a short run profit enhancement

opportunity but in fact will have a major long term implication.

IF ALL THE DISTRIBUTORS OF BALDWIN AGITATE AGAINST

THE DISCRIMINATION AND INSIST ON BEING BILLED ON
MARGINAL COSTS OF $ 133 RATHER THAN TOTAL COST
THEN WHAT ARGUMENT WILL BALDWIN OFFER?
 BB 26

40 YRS IN THE BUSINESS ???

SCENARIO A: THINGS ARE GOOD.

Keeping in mind the low budget available, can Baldwin come out
with a focused communication to potential clients .

Once a threshold level is reached , aggressive communication to

consolidate position and rapidly acquire market share, if they
wish to continue in that market!!!!!!

SCENARIO B: THINGS ARE NORMAL.

SCENARIO C: THINGS ARE BAD.
HI VALU SAYS “NO” AFTER SAY A FEW
MONTHS AND BALDWINS DISTRIBUTORS AND
CUSTOMERS ARE AGITATED.
 BB 27

THE OPTIONS

1. PREMIUM SEGMENT
2. TIE UP

THE CASE OF HERO CYCLES, INDIA ?????!!

BB 28
 BB 29

Dr Ashish Varma

Ph.D, FICWA, PGDBM

Assistant Professor
Accounts and Finance

IMT, Raj Nagar

Ghaziabad.

Email: avarma@imt.edu,
sir_ashish@rediffmail.com

Cell: 09811649850