Baldwin Bicycle Company

1. The ”Relevant” Cost of

Manufacturing a Challenger Bike
• The relevant cost to manufacture a Challenger Bike
includes material, labor and the variable production
cost:
– Material: 39,80 $
– Labor: 19,60 $
– Variable overhead (40% x all overheads 24,50): 9,80 $
– Total variable costs: 69,20 $ / kpl

• Additional contribution per unit: 92,29 – 69,20 = 23,09

$
• Additional contribution total: 25000 x 23,09 = 577250 $
 2. The ”relevant” cost of carrying
Working Capital Investments
• Average inventory:
– Material: 25000 x 2/12 x 39,80 = 165833,33
– WIP: 1000 x (39,80 + 19,60x6/12 + 24,50x6/12) =
61850
– Finnished products: 500 x 83,90 = 41950
– Total: 269633,33 $

• Percentage of relevant costs: 23,5%

– Total: 23,5% x 269633,33 = 63363,83
– Per unit: 63363,33 / 25000 = 2,53 $
 3. The ”relevant” erosion costs
• If Baldwin accets the deal, it will lose 3000 units
of regular bike sale.
• The relevant cost of erosion is the contributions
margin

• Sales revenue per unit (year 1982): 10872000 /

98791 units = 110,05 $ per unit
• Costs per unit: 8045000 / 98791 = 81,43 $
• Contribution margin per unit: 28,62
• Erosion cost: 3000 x 28,62 = 85860 $
 4. ROI
• Revenue: 25000 x 92,29 = 2307250 $
• Costs:
– Costs of goods sold: 25000 x 69,20 $ = 1730000 $
– One time added costs: 5000 $
– Working capital investment: 63363,83 $
– Erosion cost: 85847,90 $
– Total cost: 1884211,73 $

• Profit: 2307250 – 1884211,73 = 423038,27 $

• ROI: 423038,27 / 1884211,73 = 22,45 %
 5. Kassavirta
• On awerage a bike will remain two months in
warehouse.
• Payment follows in 30 days when the bioke is sold.

• Cash inflow, 4 times in a year = 92,29 $ x 25000 unit / 4

= 576812,5 $

• Cash outflow: 25000 units x 83,90 $ x 3/12 = 524375 $

• Cash account: 342000 $

 6. Financial situation
• Return on equity: 255000 / 3102000 = 0,08
• Return on sale: 255000 / 10872000 = 0,02
• Return on assets: 255000 / 8092000 = 0,03
• Liability to equity ratio: 4990000 / 3102000 =
1,61
• Current ratio: (342000 + 1359000 + 2756000)
/ (512000 + 340000 + 2626000) = 1,28
 7. Strategic position
• Sensitivity analysis needed
– Different volumes
• Risk analysis needed
– Current dealers, additional competition, future of
the market, price volatility
• Assumptions, not told in the case:
– Different bikes/ models, different product mix etc.