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Financial Impact On An Organization: Baldwin Bicycle Company

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Question:

Discuss about the Financial Impact on an Organization for Baldwin Bicycle Company .

 

Answer:

Introduction:

The present assignment presents the accounting and financial impact on an organization Baldwin Bicycle Company currently, operating in business of bicycle and proposing to include new range of bicycle. In a marketing strategy introduction of new production leads a company to rise in growth and sustainability of the business as well as cannibalization of existing market share of sales of products. In the assignment impact on additional profit, non- recurring additional costs, additional assets and related carrying cost is been chalked out. Additionally, impact on the overall profit and various financial returns has also been measured. 

1:

 Baldwin Bicycle Company included 10 models of bicycle of two different ranges in the year 1989 proposed to enter into business with the buyer Hi- Value. Currently, the sales revenue of the Baldwin Company is around $10 million per year whereas gross profit from the sale of product is around $ 2.8 million (DeFond and Park, 2012). From the new range of products the expected profit in context to the tender provided by the buyer in first year i.e. 1989 is determined below:

Expected added profit from the challanger line:

   

As per the proposal of Hi- Valu

     
       

Particulars

No. of units

Amount per unit $

Amount $

 

 

 

 

Price of bikes (a)

25,000

92.29

2,307,250.00

Estimated first year cost:

 

 

 

Materials

25,000

39.80

995,000.00

Direct Labour

25,000

19.60

490,000.00

Overhead:

25,000

24.50

-

Variable @40% of Overhead

25,000

9.80

245,000.00

Fixed overhead 60% based on 100,000 units

 

 

367,500.00

One time cost $ 2,500 per month

-

-

30,000.00

Total cost (b)

25,000

 

2,127,500.00

 

 

 

 

Profit to be earned (a-b)

 

 

179,750.00

Reasons:

The above calculation is done by considering the proposed data given by Hi- value for 25,000 bicycles for a year before escalated price. It is provided that the inflation escalation will take place after first year hence the prices are taken before the escalation adjustment.

Overhead cost incurred for the new range of products is partly variable and partly fixed which is based on 100000 bicycles. Variable cost is 40% of overhead and fixed cost is 60%.

Additionally, the onetime cost given is according to per month basis hence the cost is taken as fixed cost and derived for 12 months @2500 $ per month.

Therefore, additional expected profit earned by the Baldwin Company will be $ 179,750/-

2:

Cannibalization in the marketing strategy means the decrement in the sales volume or sales turnover of existing product due to the production or trading of new product range. In the given case, Baldwin Bicycle Company is into the business of bicycle since 40 years which introducing the new product range of bicycles to its business. This introduction will get the company an additional turnover as well as market growth but subsequently will decline the existing product market share (Bain, 2013).

At present, the sales turnover of the entity is around $10.00 million per year while cost of sales per year is around $ 8.00 million and net income after considering other expenses and taxes is $ 0.25 million. The impact on this existing income structure will be against the existing product if we consider Gross income i.e. sales revenue less cost of sales but the impact would be in favour of the net income is considered. This is because the fixed cost allocation will spread from 100,000 units to 125,000 units, which in turn would decrease the cost per unit as fixed cost for any production does not change (Moorthy and Png, 2012). On the other hand, introduction of new products enable a company to grow and develop its business and sustainability in the market structure provided the new product range match as per the quality of the existing product.

3:

One-time costs refer to those costs, which are non- recurring in nature and are not considered while measuring the operating expenses of an enterprise. Further, there are some costs, which are one time yet to be included for measuring operating expenses (Hanlon, Lester and Verdi, 2015). For example, fixed overhead costs, onetime costs for a particular parts of products, registration costs etc.

In case of Baldwin Bicycle Company, there are certain costs to be recorded and reported as one time basis only. Fixed overhead cost, which is 60 % of the total overhead cost of the product, based on 100,000 units of bicycles. Apart from this cost, Baldwin is required to record estimated non- recurring cost on new range of bicycles i.e. cost of research and development of the proposed bicycles designs, arrangement of sources for fenders, seats and other few parts of the bicycle at the rate of $ 2,500 per month. Apart from these costs, onetime costs also include loss on revenue due to inflation escalation price, which is reported by the company if the buyer provides such adjustments (Dugar and Tripathi, 2015). In the case given, Hi- Value (buyer) has provided Baldwin the tender for inflation escalation clause, which affects the total cost per unit $ 83.90 to $ 92.29.

 

4:

In accounting, the most important aspect for a company in the financial statement is assets, liabilities and inventory. Assets and liabilities of an organization presents a financial position of a company at the end of the accounting year for the useful information for its users. Moreover, inventory is also an important aspect of a financial statement, which is reported on carrying cost, states the value of products remained unsold at the year end. Inventory provides the impact on the efficiency and marketing strategy of the company’s performance in the entire accounting year (Bain, 2013).

In case of Baldwin Bicycle Company, present non- current asset plant and equipment at a carrying cost of around $ 3.6 million where as current assets valuing at around $4.00 million and inventories at carrying cost $ 2.8 million. On the introduction of new range of products, Baldwin would incur additional assets at related carrying cost which effects the financial position of the company for the year 1989. Proposed project will incur asset related costs in the form of annual variable cost as a percentage of dollar value for pretax cost of funds, record keeping costs, etc total valued at 23.0 percentage of dollar value i.e. 8.092 million $ * 1.23 = $ 9.953 million. Further, added inventory costs incurred will be at an average of two months production for work in progress as well as finished products. Given, 1000 bikes for work in progress and 500 bikes as finished products at carrying cost in proportion to $ 2.7 million *( 0.6%+6.0%)= $0.1782 million (Hanlon, Lester and Verdi, 2015).

5:

On taking new production of products by an organization maximum impact falls on the overall profits of the company as well as earnings on assets and equity. Profit is the earnings of a company from the sale of its products considering recurring and non- recurring expenditure. Whereas return on sales is computed by taking net income before interest and taxes to sales which states the efficiency of an entity on generating its profits. On the other hand, return on assets indicated on efficiency of profitability in terms of total assets and return on equity indicates earnings to the equity shareholders of the company (Dugar and Tripathi, 2015). Hence, in case of Baldwin, the overall impact of earnings in various financial terms is as follows:

 

Impact of Return:

 

 

Amount $

 

 

 

 

 

a

Profit in the year 1988

 

 

255,000.00

 

Addition profit for 1989

 

 

179,750.00

 

Total profit

 

 

434,750.00

 

 

 

 

 

b

Return on sales:

 

 

 

 

 

 

 

 

 

Total profit

 

 

434,750.00

 

Add: Interest

 

 

473,000.00

 

Add: tax

 

 

218,000.00

 

Net Income before interst and tax:

(i)

 

1,125,750.00

 

Sales ($10,872+ $2,307)

(ii)

 

13,179,000.00

 

 

 

 

 

 

Return on sales (i/ ii)

 

 

8.54

 

 

 

 

 

c

Return on assets:

 

 

 

 

 

 

 

 

 

Net Income before interest and tax:

(i)

 

1,125,750.00

 

Total Assets ($8,092 * 1.23)

(ii)

 

9,953,160.00

 

 

 

 

 

 

Return on assets (i/ ii)

 

 

11.31

 

 

 

 

 

d

Return on equity

 

 

 

 

 

 

 

 

 

Net Income

(i)

 

1,125,750.00

 

Total equity

(ii)

 

3,102,000.00

 

 

 

 

 

 

Return on equity (i/ ii)

 

 

36.29

Hence the impact of overall profits and returns of Baldwin is favourable and at an increasing rate (Dugar and Tripathi, 2015). The net profit shows the increase in value at around $ 0.179 million and proposed return on total sales at 8.54 % and return on assets and equity at 11.31% and 36.29% respectively.

6:

As per the given case study, in the strategic deal between Baldwin Bicycle Company and Hi-Value, there are some risks and rewards available to both Baldwin as well as Hi-Value. In case of Baldwin, the company needs to sale the bicycles to Hi-Value at a lower price if it enters in to the deal. This may decrease the normal profitability of the company, which is a risk for the company (Bansal and Kaur 2016). However, as the market demand and country’s economic situation are at declining stage, the company can at least sale its inventory and can get a permanent buyer in the market.

On the other side, in case of Hi-Value, if the company makes the deal with Baldwin, then it can grab the sports bicycle market in a better way. At the same time, the company can buy the bicycle of Baldwin at a price which is lower than the market price. Therefore, these two are the rewards for the company. However, the main risk for Hi-Value that is associated with this particular business deal is the declined market demand. Due to this, the company may face problem to sell the bicycles after purchasing from Baldwin. On the other side, it may also happen that the market price of the bicycles gets down because of the poor economic situation in the country (Coskun and Kulali 2016).

Therefore, this is very important for both the companies to make the business deal by analyzing the overall situation properly.

7:

In order to avoid the risks in the business deal with Hi-Value, Baldwin needs to take some steps and these steps are as under:

At first the company needs to select the price range by keeping a standard profit level. Otherwise, if the prices of the raw materials certainly increase, then the company may face loss for 6 months because as per the deal no company can break the deal before giving 6 months notice period.

Another step that the company may take is the company needs to improve its present capacity of producing bicycles. This is very important in order to decrease the cost level of the company (Peng 2015). If the company increases its capacity and decreases its level of costs, then the company can earn a good amount of profit after selling the bicycles to Hi-Value at a price lower than the market price.

The company must maintain a standard level of inventory so that if in any particular month the demand in the market increases, then it can supply the products that is bicycles in the market (Coskun and Kulali 2016). At the same time, as Hi-Value wants to maintain their inventory level for two months, the company that is Baldwin must maintain the inventory level in order to meet the inventory requirement of Hi-Value.

Therefore, from the above, it can be said that if Baldwin goes for the business deal with Hi-Value, it needs to take some necessary steps in order to reduce the level of future risks.

Conclusion:

The above case has been dealt with the derivation of additional and overall profit of the company, Baldwin Bicycle on entering in the production of new range of bicycles from the financial year 1989. The introduction of new products in agreement with the proposed buyer Hi- value states the impact on various financial factors relating to the quantity and quality of the products. Before the introduction of new products, sales of the company were around $ 10.8 million per year which increased to $13.00 million per year approximately. Apart from the additional sales, company had to incur few one- time costs related to research and developments, drawings and other sources of marketing. Moreover, Baldwin had to incur additional costs on assets as percentage to dollar value which increased the overall cost of the company. However the introduction of the new product spread a good and favourable impact on the earnings to equity shareholders of Baldwin at around 36.29 % while return on sales at 8.54 %.

 

Reference List:

 Bain, J.S., 2013. Relation of profit rate to industry concentration: American manufacturing, 1936-1940. The Quarterly Journal of Economics, pp.293-324.

Bansal, A. and Kaur, A., 2016. A risk and return analysis of selected unit linked insurance plans of selected public and private sector insurance companies. International Journal of Economics and Business Research,11(1), pp.83-99.

Coskun, M. and Kulali, G., 2016. Relationship between Accounting Based Risk and Return: Analysis for Turkish Companies. International Journal of Business and Management, 11(4), p.240.

DeFond, M.L. and Park, C.W., 2012. Smoothing income in anticipation of future earnings. Journal of accounting and economics, 23(2), pp.115-139.

Dugar, P. and Tripathi, V., 2015. Convergence to IND AS 16: Changes and Implications. IUP Journal of Accounting Research & Audit Practices, 14(3), p.7.

Hanlon, M., Lester, R. and Verdi, R., 2015. The effect of repatriation tax costs on US multinational investment. Journal of Financial Economics,116(1), pp.179-196.

Moorthy, K.S. and Png, I.P., 2012. Market segmentation, cannibalization, and the timing of product introductions. Management Science, 38(3), pp.345-359.

Peng, L., 2015. The risk and return of commercial real estate: A property level analysis. Real Estate Economics.

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