Baldwin Bicycles

“Baldwin Bicycle Company”

1. What is the “relevant” cost of manufacturing a Challenger bike?

In conducting preliminary financial analysis, Ms. Leister must consider quantitative elements in order to determine which alternative would be most financially beneficial to Baldwin. These include: different revenues, different costs (cost of sales, one-time costs, asset-related costs, tax expenses, etc.), and differential profit.

Base Case Balance Sheet

Assets Liabilities and Owners Equity

Cash $342,000 Current liabilities $3,478,000

Accounts Receivable 1,359,000 Noncurrent liabilities 1,512,000

Inventories 2,756,000 Total liabilities 4,990,000

Plant and equipment (net) 3,635,000 Owners’ equity 3,102,000

$8,092,000 $8,092,000

Alternative Balance Sheet

Assets Liabilities and Owners Equity

Cash $342,000 Current liabilities $4,011,402

Accounts Receivable 1,622,769 Noncurrent liabilities 1,512,000

Inventories 3,025,633 Total liabilities 5,523,402

Plant and equipment (net) 3,635,000 Owners’ equity 3,102,000

$8,625,402 $8,625,402

Base Case Income Statement Alternative (Year 1) Income Statement

Sales revenues

Baldwin $10,674,900

Hi-Valu $2,307,250

Sales revenues $11,005,051 Total sales revenue $12,982,150

Cost of sales

Baldwin $7,899,151

Hi-Valu $2,097,500

Cost of sales 8,143,454 Total cost of sales $9,996,651

Gross margin 2,861,597 Gross margin $2,985,499

Other expenses 2,354,000 Other expenses $2,354,000

Income before taxes 507,597 Income before taxes $531,120

Income tax expense 233,945.34 Income tax expense $244,786.81

Net income $273,651.66 Net income $286,333.19

2. What is the “relevant” cost (on a per bicycle basis) of varying the working capital investment involved in the Challenger deal?

Differential revenues are revenues that are different under one set of conditions than they would...