Please read the attached case and answer the following questions.
1. What is the expected incremental profit from the Challenger bike?
2. What are the strategic risks and rewards?
3. What should Baldwin do? Why?
Thank you very much in advance.
EXPECTED INCREMENTAL PROFIT FROM THE PROPOSAL MADE TO BALDWIN:
The new price offered is $92.29. Now as the variable overhead is 9.80, labor is 19.60 and materials are 39.80 we get a total of 69.20. So in this case the additional contribution is $23.09. if the volume offered by Hi-Valu is 25,000 we get an annual contribution of $577,250.
If Baldwin supplies to Hi-Valu then it will lose sales of 3,000. The sales value of these will be $113, 39 and the variable costs will be $69.20 so the contribution lost will be $44.18. If we multiply this by 3,000 we get $132,546,97.
There will be additional assets and related costs. For example, one month's raw materials are expected to remain in warehouses for 2 months, so if we take variable cost to be 39,80 and one month's bikes as 2,083 and carrying ...
Finance Short Case is discussed very comprehensively in this explanation.