ASSIGNMENT SUBMISSION FORM
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Course Name: MADM
Assignment Title: Baldwin Bicycle Company
Submitted by: Section E, Study Group E7
Student Name PG ID
Priyal Choubey 62010529
Krishna Agarwal 62010860
Ishita Saxena 62010481
Akash Begwani 62011058
Sivas S 62010955
ISB Honour Code
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• I will personally uphold and abide, in theory and practice, the values, purpose and rules
of the ISB Honour Code.
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(Please start writing your assignment below)
Question 1. What is the expected added profit from Challenger line?
The Challenger line is expected to generate added profits as below. The relevant costs have been
calculated based on the assumption that Baldwin has accepted the proposal –
Particulars Per Unit Total Units Amount
Price 92.29 25000 2307250
Labour 39.8 25000 995000
Materials 19.6 25000 490000
Overheads 9.8 25000 245000
Contribution Margin 577250
Fixed Cost (Traceable) 5000
Expected Profits 572250
*Overheads are calculated by taking 40% of 24.5 which is 9.8.
Question 2. What is the expected cannibalization of existing sales?
The following table reflects the cannibalised sales:
Particulars Balance Sheet ($) Units Sold Per Unit($)
Price 10872000 98791 110.05
COGS 8045000 98791 81.43
Variable Cost 66.55
Contribution Margin 43.50
Cannibalised Sales 43.05 3000 130500
Key calculations:
Price per unit = Total Revenue/Total Sales
COGS per unit = Total COGS/Total Sales
Variable Cost per unit = Total COGS per unit – Overheads (0.6 of Fixed Production O/H)
= 81.43 – (0.6*24.5*100000/98791) = 66.55
Contribution Margin = Price per unit – Variable Cost per unit
Question 3. What costs will be incurred on one-time basis only?
The only one-time basis only cost for Baldwin Bicycle Company is the cost of preparing
drawings and/or arranging sources for fenders, seats, handlebars, tires, and shopping boxes that
differ from those used in our standard models. The cost comes out to be $5000 (Point Number
2 – Exhibit 2).
Question 4. What are the additional assets and related carrying costs?
The additional assets and carrying costs are the following:
Additional Assets Carrying Costs (Hi-Valu)
Particulars Amount($) Particulars Amount($)
Materials 38141.67 Finished Goods 38925
WIP 9265 Receivables 25956.56
Finished Goods 7958
Total 55364.67 Total 64881.56
Total Additional Costs is $ 120246.23 which is the sum of total additional assets costs and total
carrying costs.
Key Calculations
Materials = 2-month volume * Per unit material cost * asset related cost
WIP = WIP Cycles * (Per-unit material cost + 0.5(OH + labor cost)) * (Asset related cost –
handling\labor\equipment – inventory)
Finished Goods = 2-month volume*per-unit variable cost*(pre-tax + record keeping cost)
Receivables (Hi-Valu) = Expected Volume * Per-unit Revenue * (pre-tax + record keeping cost)
Finished Gooda (Hi-Valu) = 2-month volume*per-unit variable cost*(pre-tax + record keeping
cost)
Question 5. What is the overall impact on the company in terms of (a) Profits, (b) Return
on sales, (c) Return on assets and (d) Return on Equity?
The overall impact on the company when we produce 100,000 normal bikes and 25,000
challenger bikes considering cannibalisation of 3000 units will have the following impact:
Particulars Change (in %)
Profit 62%
Return on Sales 37%
Return on Equity 54%
Return on Assets 59%
Income Statement:
Particulars Without Hi-Valu With Hi-Valu
Revenue 11005000.00 12982149.50
COGS
Fixed 1470000.00 1470000.00
Variable 6655000.00 8185350.00
Total 8125000.00 9655350.00
Gross Margin 2880000.00 3326799.50
Other Expenses 2354000.00 2474000.00
Profit Before Tax 526000.00 852799.50
Tax 242427.06 393045.01
Net Profit 283572.94 459754.49
Balance Sheet:
Assets Liabilities
Without Hi With Hi- Without Hi- With Hi-
Particulars Valu Valu Particulars Valu Valu
Cash 625343.68 65832.5 Current 3478000 3478000
A/C
Receivables 1359000 1551270.83 Non Current 1512000 1512000
Owner`s
Inventory 2756000 3299266.67 Equity 3385343.68 3561370
PPE (Net) 3635000 3635000
Total 8375343.68 8551370 Total 8375343.68 8551370
Question 6. What are the strategic risks and rewards?
Baldwin Bicycle Company exposes itself to the following risks and reaps in the following rewards
on account of accepting the Hi-Valu proposal:
Risks:
1. Loss of Distribution Channels - The order acceptance may lead to a significant reduction of
their existing channels of distribution. Apart from this, the deal may affect their relations with
some of their dealers who are Hi-valu`s competitors.
2. Cannibalisation of sales in the long run – Even though the cannibalisation is expected to
be capped at only 3000 bicycles for the next 3 years, the effect of providing a bicycle which is
high on quality may shift their customer base in the longer run. Existing Customers might shift
over to Challenger from their current bicycles.
3. Inventory Maintenance – Hi-Valu requires Baldwin to maintain a large inventory of cycles
due to the volatile nature of sales in stores and Baldwin is asked to maintain inventories for 4
months. This will lead to higher inventory holding costs and time horizons.
Rewards:
1. Better Utilisation of Plant Capacity – Baldwin is currently operating its plant at 75% of one
shift capacity. The Hi-valu deal provides Baldwin with the opportunity to increase the usage of
their plant capacity.
2. Stable Demand – Post price negotiations and agreement, Baldwin guarantees itself of bicycle
sales for the next 3 years.
3. New Market Segment – The deal provides the company to be a player in an unexplored
market segment and a higher quality cycle will give the company a better reputation for its
product.
Question 7. What should Mr. Leister do? Why?
Mr. Leister should accept the Hi-Valu deal for the expected profits that the deal will bring and
also, for the strategic advantages mentioned in the previous question. Accepting the deal provide
Baldwin with stable cash flow for the next 3 years, results in better utilisation of plant capacity,
provides economies of scale benefits.
At the same time, Mr. Leister should also be wary of the fact that the deal may lead to
cannibalisation of inhouse brand cycles in the long run, potential loss of distribution channels
and higher inventory maintenance. Despite these risks, the economics of the project makes Hi-
Valu a worthwhile deal to have.
