AV Baldwin Bicycles Mac IMT

8/8/2019 AV Baldwin Bicycles Mac IMT

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BB 1

Baldwin Bicycle Compa

ny

Dr Ashish VarmaPh.D, FICWA, PGDBM

Assistant Professor

Accounts and Finance

IMT, Raj Nagar

Ghaziabad.

Email: [email protected],

[email protected]

mailto:[email protected]



BB 2

Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity

“Margins” “Asset “Leverage” = Shareholder

Intensity” Return

255/10,872 10,872/8,092 8,092/3,102 = 255/3102

(2+%) (1.3x) (2.6x) (8%)

We should look at the industry average too!!!

“Du Pont” Model



BB 3

1. Incremental ContributionPer Unit

Revenue $92.29Less Variable Costs

Material $39.80Labor $19.60

Variable Overhead (40% of $24.50) $9.80 $69.20$23.09Total Incremental Contribution(25,000 (units exhibit 2 : pt.3) @ $23.09) = $580,000

2. One-time Design Costs$5,000; too small; ignore it!

.

.

.

Analysis of the Hi-Valu Pro

posal



BB 4

3. Investment (no fixed assets; only working capital)

At Baldwin

Units Per Unit Total

Raw Material (2 months 25000/ 12 X 2)) ~4,200 $39.80 $170,000

Accounts Payable Offset

(1 month assumed) (~2,100) $39.80 ($85,000)

Work in Process ~1,000 $54.50a $55,000

Finished Goods ~500 $69.20 $40,000

At Hi-Valu Warehouse

(2 months) ~4,200 $69.20 $290,000

Accounts Receivable

(1 month) ~2,100 $92.29 $190,000

$660,000

a Cost of a unit “1/2 complete” (39.80 +1/2 [19.60 + 9.80] )



BB 5

4. Carrying Costs

23.5%( ref exhibit 2 pt. 4) on Raw Material + WIP + Finished Goods

(23.5% on $470,000 ie ( 85 +55 + 40 +290 )) = $110,000

and 19.0% on Accounts Receivable

(19.0% on $190,000) = 40,000

$150,000

$150,000 = $6 per unit for 25000 bikes



BB 6

5. Erosion (3,000 units)

Contribution on a “regular” bike:

Sales price per unit[~$11M ÷ 99,000] = ~$110

Variable cost per unit = ~$66

Per Unit = ~$44

Incremental Erosion costs(3,000 units @ $44) = ~$130,000

.

.

.



BB 7

6. Pulling the “Relevant Cost Analysis” Together

a. ∆Contribution Margin 25,000 x $23.+ = ~$580,000

b. “Erosion” ~ 3,000 x ~ $44 = ~ $130,000

c. The Finance Charge (per item 4 above = $150,000)



BB 8Profit Model

PAT/Sales x Sales/Assets x Assets/SE = ROE

“Margins” “Asset “Leverage”

Intensity”

CURRENT: 1982

255 x 10,872 x 8,092 = 8%

10,872 8,092 3,102



BB 9

WITH CHALLENGER

4351 x 12,8722 x 8,8373 = 13%

12,872 8,752 3,282

1) $580 - Carry Cost of $150 - Erosion of $130 = $300 x~60% = ∆$180

( OLD PAT 255 + ADDITIONAL PAT 180 = 435 )

( 40% are fixed ie fixed manufacturing 14% and selling expenses 21%)

2) +$2.3M ($92 SELLING PRICE PER BIKE x 25,000 BIKES) - ∆.3M ($110 SELLING PRICE PERORIGINAL BIKE x 3,000 UNITS CANNIBALIZED) = ∆$2M

10872 + 2M = 12872

3) 8092 + 660 ADDITIONAL INVESTMENTS IN WORKING CAPITAL = 8752

3) + 85 Working Capital Assets IF NO ACCOUNTS PAY ABLE INCREASE

5) 3102 + 180 ADDITIONAL PAT = 3282



BB 10

COST OF CAPITAL

18 % PRE TAX

POST TAX ?

WHAT HAPPENS TO THIS 13% ROI WHEN THE SALES DROP ( NOT ONLY THE 3000 CANNABALIZED BUT FROM THE REMAINING LOT OF 98,000 DUE TO THE ANGER OF THE DISTRIBUTORS???)

WOULD BALDWIN BE HAPPY MATCHING THE COST OF CAPITAL OR SHOULD IT WANT TO EXCEED THE COST OF CAPITAL ?



BB 11

Note :

A discounted cash flow analysis will be better :

However refining the calculation will not changethe basic message that the HV deal is attractive

in the short run.

Therefore range

OLD RANGE: 7 TO 9%

NEW RANGE: 12 TO 14 %



BB 12

Should Baldwin be happy with this 13%?

Why ?............................................................

Why Not ?.....................................................



BB 13

Conventional Pro

• Incremental profit and incremental ROI excellent(even with erosion).

• The existing business covers the fixed costs (i.e.we are showing profits in 1982). The “Incremental”business need only show positive marginalcontribution.

• We have excess capacity and volume isn’tgrowing.



BB 14

Conventional Pro( cont.)

• Opens up a new (for Baldwin) and more stabledistribution channel (Hi Value).

• Opens up a new market segment for growth forBaldwin (The “Discount Retail” segment”).

• Risk seems low (or does it?!).



BB 15

Cons

• Can we really look at a deal on an “incremental”basis when it covers 25% of volume and runs for at

least 3 years??!!

• On a full cost basis, not attractive

• Lousy ROE ( 8% ) now; Even with the H/V deal, theROE is still not good ( 13% );



BB 16

CONS•

• Creates a major cash crunch; Highly leveragednow; No debt capacity left; How to finance theincremental investment?

• Inventory at H/V may run up to average 4months, not 2 months; Implications for ROI,cash flow, and financing?

• Additional sales losses, if current dealer’s dropBaldwin line?

• A very sweet deal for H/V; Can we negotiate abetter deal? (probably yes; should we try?)



BB 17

Tolerate terms of HV

Is it wise to tie up unused excess capacity, unused it maybe currently, for several years at well below normal

prices.

What if HV takes fewer than 25000 bikes or asks for morethan 25000 bikes?

Source of funding; given the high short term debt of $ 2.6million at the year end.

Also the production for the Christmas would be shipped out

by now, and the build up for spring wouldn’t have started,then why such high inventory ? 2.7 inventory for a 10.8sales means a inventory carrying days of 120. This slowmoving inventory is financed with short term debt.



BB 18

BALDWIN: 1982

Balance Sheet

Cash $342 A/P + Accruals $852

A/R $1,359 Bank Borrowing $2,626

Inventory (123 days)* $2,756 LTD $1,512Fixed Assets $3,635 SE $3,102

$8,092 $8,092



BB 19

Selling 2 “similar”(?) products at different pricesthroughdifferent channels to the same (?) customers

Is this H/V deal “good business”?

I. Normal Channel: Delivered cost $110 + $10(transportation) plus retail markup @ 40% on sellingprice

Selling Price = $200

II.H/V: Delivered cost $92 + $8 (transportation) plusretail markup @ 25% on selling price

Selling Price = $133

The “Positioning” Issue



BB 20

Is the $67 difference in price ($133 vs. $200)reflective of a difference in “value” to thecustomer?

Brand Image

Dealer Image

Free Assembly Service

Point of Sale Merchandising

NOTE WE ARE NOT ANALYSING FROM THE HI VALUE COMPANY PERSPETIVE.



BB 21

A comparison between old positioning and newplanned positioning ( if any )?

Should the company really look at discountdepartment stores ?

Also its probably reasonable to assume that HV willfind someone else to make the challenger bike andthat Baldwin sales will drop regardless of whatdecision Baldwin takes. Thus sales are lost whenChallenger enters the market, regardless of

Baldwins actions.

How many other bicycle producers have so much spare capacity ?



BB 22

PREMIUM BIKE

$ 300 , Sold through bike stores, eg Fuji, Trek etc

VALUE BIKE

$ 200 TO $150, Sold through hardware,toys,department stores., Ross, Columbia, Baldwin

LOW PRICE BIKE

$ 100+, Sold through discount chains, Genericbrands, Distress stock.



BB 23

• Currently profitable, but only modestly so (ROE 8%)

• Heavily leveraged ; New source of money ????

• Their old strategic niche is eroding away, slowly but surely,from “above” and “below”

• Sales volume decreasing during last 2 years

• A “solution” presents itself in the H/V offer

Is it a good “solution”?

Baldwin: Background



BB 24

• What is Baldwin’s strategic niche currently? Does it matter if theystray from that?

• Can we be a significant supplier simultaneously in two pricesegments with a substantially “identical” product?

• How to implement diverse strategies (low cost and differentiation)within the same firm? The selling and distribution costs seems tobe very high for a low margin manufacturer.

• Avoid “stuck-in-the-middle”

Baldwin will be very vulnerable to Hi valu’s dictatorship once the offer is accepted. Is this acceptable to Baldwin ?



BB 25

Is it that by accepting the HV deal, Baldwin is creating yet

another direct competitor and is offering that competitor betterprice than what it offers to its regular customers.

This does not seem to be a short run profit enhancementopportunity but in fact will have a major long term implication.

IF ALL THE DISTRIBUTORS OF BALDWIN AGITATE AGAINST THE DISCRIMINATION AND INSIST ON BEING BILLED ON MARGINAL COSTS OF $ 133 RATHER THAN TOTAL COST THEN WHAT ARGUMENT WILL BALDWIN OFFER?



BB 26

40 YRS IN THE BUSINESS ???

SCENARIO A: THINGS ARE GOOD.

Keeping in mind the low budget available, can Baldwin come outwith a focused communication to potential clients .

Once a threshold level is reached , aggressive communication toconsolidate position and rapidly acquire market share, if theywish to continue in that market!!!!!!

SCENARIO B: THINGS ARE NORMAL.

SCENARIO C: THINGS ARE BAD.

HI VALU SAYS “NO” AFTER SAY A FEW MONTHS AND BALDWINS DISTRIBUTORS AND CUSTOMERS ARE AGITATED.



BB 27

THE OPTIONS

1. PREMIUM SEGMENT2. TIE UP

THE CASE OF HERO CYCLES, INDIA ?????!!



BB 28



BB 29

Dr Ashish Varma

Ph.D, FICWA, PGDBM

Assistant Professor

Accounts and Finance

IMT, Raj NagarGhaziabad.

Email: [email protected],

[email protected]

Cell: 09811649850



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AV Baldwin Bicycles Mac IMT