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.
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.
Baldwin isn’t well poised at end of 1982 for the following reasons:
Bicycle boom has flattened out resulting the plant operating capacity to be underutilized at 75%
Challenger deal provides added capacity for a guaranteed 3 years with additional scope on a yearly contact basis
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.