Dear Students

,
The discussion of Baldwin Bicycle Company case took a little longer in the previous class to
conclude. Therefore, I am enclosing the analysis in short for obtaining final findings. Any query
regarding this case will be taken up in forthcoming tutorial session along with problems of Chapter 7
and 10.
With best wishes,
Dr. Sandhya Bhatia

CASE: BALDWIN BICYCLES
1. Contribution of Challenger bikes:

Revenue ........................................................................................................................................................................
$
92.29
Variable costs:
Materials ..................................................................................................................................................................
$39.80
Labor ........................................................................................................................................................................
19.60
Overhead ($24.50 * 40%) ........................................................................................................................................
9.80
69.20
Unit contribution ...........................................................................................................................................................
$
23.09
Times annual volume ....................................................................................................................................................
*25,000
Total contribution.....................................................................................................................................................
$577,250.00
2. Lost contribution from regular bikes:

Revenue (based on $83.90 full cost and $2,827 /
$10,872 = 26% normal margin on sales price)
$ 113.38
Variable costs ................................................................................................................................................
69.20
Unit contribution
$ 44.18
Times lost annual volume ..............................................................................................................................
*3,000
$132,540
3. One-time added costs of $5,000. It is doubtful that they are differential, since these tasks probably
will be performed by Baldwin’s employees who do these kinds of tasks as part of their normal job
responsibilities and shall not be paid additionally for designing Challenger bike.
But this cost can be included if it is clearly assumed that these tasks require differential outlays and
are required to be paid additionally.
4. Added assets and related costs:
Materials: (25,000 *2/ 12) * $39.80 * 23.0%
WIP: 1,000 [$39.80 + ½ ($19.60 + $9.80)] * 17.0%
Finished goods: 500 * $69.20 * 23.0%

=
=
=

Finished goods at Hi-Valu:(25,000*2/12) * $69.20 * 13.5%
Hi-Valu receivables: (25,000 / 12) * $92.29 * 13.5%

=
=

$ 38,142
9,265
7,958
55,365
38,925
25,957
$120,247

......................19.............................533) It shall be worthwhile to accept the offer keeping in mind the net incremental contribution associated with the production of Challenger bikes.............000*2/12*39.............................177. Cost saving in taking 2 months’ payables would be 25.............. making total holding costs $120.....5%=19....... $ 577.............................................One can take a stand that added materials would be financed by additional interest-free accounts payable........................................................177) Net incremental contribution .................................................540) Incremental contribution 444................. Summary (assuming only variable costs are differential): New contribution from Hi-Valu .070= $101..............070........................................................................... 463 (or $343. $324................ (132........................... ...................247) (or $101..710 Less: Added asset holding costs ....................250 Less: Contribution lost on regular sales.......... 5.......................... Both approaches are correct..................................80*11........... (120...........247..

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