Iped, Inc., produces bike parts (for example, wheels, frames, tires, and sprockets) and uses these parts to assemble bikes. Iped sells the bikes to a distributor that sells the bikes to retailers. Assume that a weighted-average cost-of-capital of 12 percent is appropriate for Iped. Here are the costs and revenues of each stage of the value chain. All data are for the production of enough bike parts to produce 10,000 bikes.
Bike Part Production The estimated market value of production assets at the beginning of the year is $1,400,000 and at the end of the year is $1,340,000. Revenues, if the parts were sold in the market, would be $300,000. Operating costs total $100,000, excluding depreciation.
Bike Assembly The estimated market value of bike assembly assets at the beginning of the year is $600,000 and $400,000 at the end of the year. Revenues, if the bikes were sold in the market, would be $1,500,000. Operating costs total $1,250,000, excluding depreciation.
Distributor The distributor sells the bikes for $175 per bike. The cost of the bike to the distributor (cost of goods sold) can be found by reviewing the sales from bike assembly. Operating costs total $5 per bike, including economic depreciation. The cost-of-capital for the distributor is $12 per bike.
Retailer The retailer sells the bikes for $250 per bike. The cost of the bike to the retailer (cost of goods sold) can be found by reviewing the sales from the distributor. Operating costs total $33 per bike, including economic depreciation. The cost-of-capital for the retailer is $4 per bike.
a. Compute the profits of each stage of the value chain. Show amounts in total (for 10,000 bikes) and per bike.
b. Assume you are advising a loan approval committee in a bank. Write a short memo to the loan approval committee in which you evaluate the profitability of the company.