Baldwin Bicycle Company
BB 1
Baldwin Bicycle Company
Objectives of Session
1. Practice in applying a comprehensive financial analysis framework to a “new business” opportunity.
2. Blending strategic marketing analysis and financial analysis. 3. Blending corporate strategy with marketing strategy
This case is an excellent one for contrasting the conventional framework (Relevant Cost Analysis) with the Superior (?) framework
(SCM)
BB 2
1973—15 million bikes sold “bicycle boom” (Baldwin 135,000)
1982—10 million bikes sold (Baldwin 99,000)
Baldwin: 1982 “Structural Financial Model”
Capacity used now
Total Capacity (one shift)
Cost Structure
Fixed Mfg. (14% sales)
S&A (22% sales)
“Fixed”
98,791 units
131,721 units
$1470
$2354
$3824
Selling Price
Variable Cost
Contribution
“Variable”
Per Unit
$110
$66
$44
BB 3
“Du Pont” Model
Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity
“Margins”
“Asset
Intensity”
“Leverage” =
Shareholder
Return
255/10,872
10,872/8,092
8,092/3,102 =
255/3102
(2+%)
(1.3x)
(2.6x)
USA Average?
(8%)
BB 4
1. The Relevant Cost Analysis—6 Steps
2. The “SCM” Analysis
a.
b.
c.
d.
Basic Economics—Two ways
Balance Sheet Review—Why relevant?
Market Segmentation
Product Positioning
3. A Strategic Assessment of the Decision
4. What would you recommend?!?!
BB 5
Analysis of the Hi-Valu Proposal
1. Incremental Contribution
Revenue
Less Variable Costs
Material
Labor
Variable Overhead (40% of $24.50)
Per Unit
$92.29
$39.80
$19.60
$9.80
$69.20
$23.09
Total Incremental Contribution
(25,000 units @ $23.09) = $580,000
2. One-time Design Costs
$5,000; too small; ignore it!
QUESTION:
Can we ignore a share of “fixed” manufacturing and selling & administrative expenses? Conventional framework says “Yes, ignore it.”
BB 6
3. Investment (no fixed assets; only working capital)
OR, Per
At Baldwin
Raw Material (2 months)
Accounts Payable Offset
(1 month assumed)
Work in Process
Finished Goods
At Hi-Valu Warehouse
(2 months)
Accounts Receivable
(1 month)
a
Baldwin Bicycle Company
Objectives of Session
1. Practice in applying a comprehensive financial analysis framework to a “new business” opportunity.
2. Blending strategic marketing analysis and financial analysis. 3. Blending corporate strategy with marketing strategy
This case is an excellent one for contrasting the conventional framework (Relevant Cost Analysis) with the Superior (?) framework
(SCM)
BB 2
1973—15 million bikes sold “bicycle boom” (Baldwin 135,000)
1982—10 million bikes sold (Baldwin 99,000)
Baldwin: 1982 “Structural Financial Model”
Capacity used now
Total Capacity (one shift)
Cost Structure
Fixed Mfg. (14% sales)
S&A (22% sales)
“Fixed”
98,791 units
131,721 units
$1470
$2354
$3824
Selling Price
Variable Cost
Contribution
“Variable”
Per Unit
$110
$66
$44
BB 3
“Du Pont” Model
Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity
“Margins”
“Asset
Intensity”
“Leverage” =
Shareholder
Return
255/10,872
10,872/8,092
8,092/3,102 =
255/3102
(2+%)
(1.3x)
(2.6x)
USA Average?
(8%)
BB 4
1. The Relevant Cost Analysis—6 Steps
2. The “SCM” Analysis
a.
b.
c.
d.
Basic Economics—Two ways
Balance Sheet Review—Why relevant?
Market Segmentation
Product Positioning
3. A Strategic Assessment of the Decision
4. What would you recommend?!?!
BB 5
Analysis of the Hi-Valu Proposal
1. Incremental Contribution
Revenue
Less Variable Costs
Material
Labor
Variable Overhead (40% of $24.50)
Per Unit
$92.29
$39.80
$19.60
$9.80
$69.20
$23.09
Total Incremental Contribution
(25,000 units @ $23.09) = $580,000
2. One-time Design Costs
$5,000; too small; ignore it!
QUESTION:
Can we ignore a share of “fixed” manufacturing and selling & administrative expenses? Conventional framework says “Yes, ignore it.”
BB 6
3. Investment (no fixed assets; only working capital)
OR, Per
At Baldwin
Raw Material (2 months)
Accounts Payable Offset
(1 month assumed)
Work in Process
Finished Goods
At Hi-Valu Warehouse
(2 months)
Accounts Receivable
(1 month)
a