1. Baldwin Bicycle Company

2. 1. The ”Relevant” Cost of Manufacturing a Challenger Bike
The relevant cost to manufacture a Challenger Bike includes material, labor and the variable production cost:
Material: 39,80 $
Labor: 19,60 $
Variable overhead (40% x all overheads 24,50): 9,80 $
Total variable costs: 69,20 $ / kpl
Additional contribution per unit: 92,29 – 69,20 = 23,09 $
Additional contribution total: x 23,09 = $

3. 2. The ”relevant” cost of carrying Working Capital Investments
Average inventory:
Material: x 2/12 x 39,80 = ,33
WIP: 1000 x (39, ,60x6/ ,50x6/12) = 61850
Finnished products: 500 x 83,90 = 41950
Total: ,33 $
Percentage of relevant costs: 23,5%
Total: 23,5% x ,33 = 63363,83
Per unit: 63363,33 / = 2,53 $

4. 3. The ”relevant” erosion costs
If Baldwin accets the deal, it will lose 3000 units of regular bike sale.
The relevant cost of erosion is the contributions margin
Sales revenue per unit (year 1982): / units = 110,05 $ per unit
Costs per unit: / = 81,43 $
Contribution margin per unit: 28,62
Erosion cost: 3000 x 28,62 = $

5. 4. ROI Revenue: 25000 x 92,29 = 2307250 $ Costs:
Costs of goods sold: x 69,20 $ = $
One time added costs: 5000 $
Working capital investment: 63363,83 $
Erosion cost: 85847,90 $
Total cost: ,73 $
Profit: – ,73 = ,27 $
ROI: ,27 / ,73 = 22,45 %

6. 5. Kassavirta On awerage a bike will remain two months in warehouse.
Payment follows in 30 days when the bioke is sold.
Cash inflow, 4 times in a year = 92,29 $ x unit / 4 = ,5 $
Cash outflow: units x 83,90 $ x 3/12 = $
Cash account: $

7. 6. Financial situation Return on equity: 255000 / 3102000 = 0,08
Return on sale: / = 0,02
Return on assets: / = 0,03
Liability to equity ratio: / = 1,61
Current ratio: ( ) / ( ) = 1,28

8. 7. Strategic position Sensitivity analysis needed Risk analysis needed
Different volumes
Risk analysis needed
Current dealers, additional competition, future of the market, price volatility
Assumptions, not told in the case:
Different bikes/ models, different product mix etc.