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Essay on Baldwin Bicycle

Decent Essays

Case Summary:

Baldwin Bicycle Company has long history in manufacturing bicycles. Currently, they receive a Challenger deal from Hi-Valu. This proposal contains some special requirements such as to have larger inventory, sell at lower price, and have “Challenger” name on bicycle tires. Suzanne Leister, marketing vice president of Baldwin Bicycle Company, is considering whether or not to accept this proposal. The issues are listed below:

The Relevant Cost of Manufacturing a Challenger Bike | Cost analysis | The Relevant Cost of Working Capital Investments | Relevant cost analysis | The Relevant Erosion Charge | Profit analysis | The Incremental Return on Investment | Ratio analysis; incremental ROI | The Major Cash Flow …show more content…

The incremental return on investment is 22.45%, from the calculation of $423,038.27/$1,884,211.73. It indicates that this Challenger Deal is profitable.

Revenue [25,000*92.29] | $2,307,250.00 | Cost: | | COGS [69.20*25,000] | $1,730,000.00 | One-time Added Cost | $5,000.00 | Working Capital Investment | $63,363.83 | Erosion Cost | $85,847.90 | Total Cost | $1,884,211.73 | Profit | $423,038.27 |

5. The Major Cash Flow Implication of the Challenger Deal

On Average, a bike would remain in regional warehouse for two months, and the payment is in the following 30 days when bicycles are sold. This indicates that there are 4 times cash inflows each year. The estimated cash inflow is $2,307,250. The cash outflow that is associated with the inventory is 25,000*83.90*3/12, which is $524,375.

6. Baldwin’s Financial Situation at the end of 1982

The return on equity indicates how well managers are employing the funds invested by the firm’s shareholders to generate returns. Baldwin has a return on equity of 0.08, which indicates that the funds invested in the company have relatively low return. Baldwin’s the return on sales, which is 0.02, shows the profitability of the company’s operating activity. It indicates that Baldwin’s profit is relatively low. Moreover, the return on asset is low as to be 0.03.

The liability to Equity

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