Submitted by: Ashik Ahmed

Case Analysis: Baldwin Bicycle Company

Submitted by:
Ashik Ahmed
Roll No: 190101032
Section: D

Problem Statement: Should the company accept or reject the Hi-Valu Stores proposal?
1. Expected profit from Challenger line:
Contribution Per Bike
Revenue $ 92.29
Variable Costs
Materials $39.8
Labor $19.6
Overhead $9.8
Total Variable Costs $69.2
Unit Cost Contribution $93.09
Total Contribution 93.09*25000= $ 577250

2. Sales Price per unit = (2827/10872) = 26%

Materials $ 39.8
Labor $ 19.6
Overhead $ 24.5
Costs 83.9/0.74 = $ 113.35
Variable Costs $ 69.2
Contribution Margin $ 44.18
Loss Annual Volume 3000
Total loss Contribution $ 132540

3. The one time added cost that will be incurred is $ 5000 Labor Costs for drawing and
arranging the resources. This cost is not as high as the company can perform it.

4. Additional assets and related carrying costs:

Materials (1041.07*9.154) = $9538.47

WIP $ 9265
Finished goods $ 7958

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Submitted by: Ashik Ahmed

Finished Good at Hi-Valu $ 36925

Hi-Valu Receivables $ 25957
Total Asset Holding Cost $ 120247

5.
a) Profit:
Contribution from Hi-Valu $ 577250
Less: Loss Contribution from Regular Bike $ 132540
Added Asset Holding Cost $ 12247
Income Before Taxes $ 324463
Income Tax $ 149252.98
Income After Tax $ 175210.02

b) Return on Sales:
1989 Decline Accept Change
Alternative 1 Alternative 2
Sales 10872 11338 13305 1967
Cost of Sales 8045 8143 9665 1522
Gross Margin 2827 3195 3640 445
Other Expenses 2354 2354 2474 120
Income Before 473 841 1166 325
Tax
Income tax 218 388 537 149
Net Income 255 453 629 176
Return on Sales 2.35% 4% 4.73% 0.73%

c) Return on Assets:
1989 Decline Decline Change
Alternative 1 Alternative 2
Assets 8092 8545 8721 176
Net Income 255 453 629 176
Return on Assets 3.15% 5.45% 7.48% 2.04%

d) Return on Equity:
1989 Decline Decline Change
Alternative 1 Alternative 2
Equity 3102 3555 3731 176
Net Income 255 453 629 176
Return on Equity 8.22% 12.74% 16.86% 4.12%

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Submitted by: Ashik Ahmed

6. Strategic Risks and Rewards:

Do Not Accept
Risks Rewards
 Loss of Additional Profit  Maintain loyal customers
 Loss of opportunity to market  No additional competition
 Idle capacity to continue  Use unused capacity to make new
 Continuous decline of sales of Baldwin products
Bicycle due to weak economy

Accept
Risks Rewards
 Additional Competition with Challenger  Opportunity to provide departmental
Bikes chain
 Loss of opportunity to enter the market  Sure order for three years despite the
using Baldwin as a brand poor economy
 Present deals might go  Using the excess capacity to
accommodate Hi-Valu

7. Due to the poor economy, in the short-run, the company should accept the proposal of Hi-
Valu due to the additional profit chances they have.

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