Baldwin Bicycles

Baldwin Bicycle Case Study

1. The relevant costs are those that occur in the future and differ for each feasible alternative. These relevant costs should be compared to the current situation at Baldwin in order to evaluate the decision to join with Hi-Valu:

Per units cost $83.90

R&D Cost (5000/25000) 0.2

Other variable costs** 18.44

Total $102.54

** 5.5% of assets

Added estimate of monthly inventory cost to balance sheet info to estimate avg assets

2 months materials

(25000 bikes/12 mo x 2 mo inv) x 38.90 $165,847

WIP inv (1000 x 83.90) 83900

Finished Goods (500 x 83.90) 41950

Inc to assets 291697

Current assets 8092000

Assets est 8383697

x.055 461103

divided by 25000 bikes 18.44

2. Cost of capital = 18% 102.54

cost per bike times 25000 bikes 25000

2563500

0.18

461430

divide by 25000 bikes $18.46

3. Product cannibalization refers ot the phenomenon whereby a new product introduced by a firm competes with and reduces sales of the firm's existing products. It can be argued that this is a negative incremental effect of the new product and the lost cash flows or profits from the exisitng products should be treated as costs in analyzing whether or not to introduce the product. However, if the possibility of introducing the new product is rejected because of these cannibalization costs, a competitor now has the opportunity to fill the niche of this new product and will also erode the sales of the firm's existing products. If Baldwin turned down the deal with Hi-Valu, Hi-Valu will look to a competitor of Baldwin's and sales will be lost in both cases. The projected 3% sales decrease is not enough to kill the project and with the bicycle business having major ups and downs in recent years, one cannot predict how sales will increase in coming years. I do not think that the erosion costs should be considered when looking at the decision to produce the challenger bicycles.

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5. The major cash flow