1 Estimated costs of producing the average Supremo bike (avg unit costs, assuming a constant mix of models) Direct Materials 12 Euros more than the average Bissan bike Direct Labour 20 higher than the average Bissan bike Variable Overhead 50 of Direct Labour Total Fixed Overhead 7 087 500 (the per bike amount depends on production levels) 2 Unit price and annual volume MikRos has guaranteed an order of 24,000 mountain bikes and will pay an average price of EUR325 3 Asset related costs include Pretax cost of funds (interest to finance receivables or inventories) 18,0 Effective tax rate 46,5 4 Assumptions for Supremo related added inventories (average over the year) and cash Required Materials 2 months' supply Work in Process 1,000 bikes, half completed for all cost categories Finished Goods 500 bikes awaiting next truckload shipment to MikRos warehouse Goods in MikRos regional warehouse Two months (on average) production Accounts Receivable Cash tied up due to the net 30 days policy 5 Cetin Ceviz's opinion on the effect on Bissan sales if proposal is accepted Some customers comparison shop for bikes, and some may purchase a challenger bike as a good value purchase My best guess is that our sales over the next year will be about 150,000 bikes a year if we forego the MikRos deal If we accept it, I think we we'll lose about 3,000 units of our regular sales over the year These estimates do not include the possibility that a few of our current dealers might drop our line if they find out we're making bikes for MikRos 1 a) From Bissan's balance sheet, what is their current debt equity ratio b) Bissan has the option of borrowing money from the bank Their bank has a restriction on borrowing that does not allow a debt equity greater than 1 Given their balance sheet at December 31, 2013, how much more money can Bissan borrow (on January 1, 2014) without violating this restriction c) Suppose Bissan decides to borrow the 2,200,000 and produce the Supremo bikes, which in turn increases the total liabilities After financing the project, how much more will Bissan be able to borrow in the future (for other needs) without violating the restriction 2 Bissan is worried about cannibalization if they accept the deal they fear the Supremo will compete with their regular Bissan bikes and hurt their sales Assume that the contribution margin of the Supremo is 64 00 after deducting the interest charges and the contribution margin of the regular Bissan bike is 140 00 What is the maximum amount of cannibalization that Bissan can afford in their regular lines given the extra revenue generated by the MikRos deal Answer in number of bikes 3 Bissan expects to lose about 3,000 units of regular sales over the year if they accept the deal, and will decrease their production of regular bikes accordingly Considering all the changes in sales, production levels, production costs, and interest costs, predict what the income statement will look like for next year if they accept the deal Use the template below and report positive numbers a) Revenue b) Cost of Goods Sold c) Gross Margin d) Selling and Administrative Expenses e) Income before taxes f) Income tax expense g) Net Income Assets Liabilities and Owners' Equity Bank Indebtedness Accounts Payable Long Term Loans Payable 1 897 000 879 000 1 191 000 Cash Accounts Receivable Raw Materials Inventory Work in Process Inventory Finished Goods Plant and Equipment (net) 254 000 1 701 000 1 004 000 1 298 000 2 543 000 4 001 000 Total Liabilities 3 967 000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6 834 000 10 801 000 Total Assets 10 801 000 BISSAN BIKE INC Income Statement For the Year End December 31, 2013 Production (Bikes) 150 000 Total Fixed Overhead 7 087 500 Per Bike Fixed Overhead 47,25 Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income 54 750 000 (40 312 500) 14 437 500 (10 950 000) 3 487 500 (1 621 688) 1 865 813 Estimated costs of producing the average Bissan bike (avg unit costs, assuming a constant mix of models) Direct Materials Direct Labour Variable Overhead (50 of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75 Assets Liabilities and Owners' Equity Bank Indebtedness Accounts Payable Long Term Loans Payable 1 897 000 879 000 1 191 000 Cash Accounts Receivable Raw Materials Inventory Work in Process Inventory Finished Goods Plant and Equipment (net) 254 000 1 701 000 1 004 000 1 298 000 2 543 000 4 001 000 Total Liabilities 3 967 000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6 834 000 10 801 000 Total Assets 10 801 000 BISSAN BIKE INC Income Statement For the Year End December 31, 2013 Production (Bikes) 150 000 Total Fixed Overhead 7 087 500 Per Bike Fixed Overhead 47,25 Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income 54 750 000 (40 312 500) 14 437 500 (10 950 000) 3 487 500 (1 621 688) 1 865 813 Estimated costs of producing the average Bissan bike (avg unit costs, assuming a constant mix of models) Direct Materials Direct Labour Variable Overhead (50 of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75

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1. Estimated costs of producing the average Supremo bike (avg. unit costs, assuming a constant mix of models): Direct Materials 12 Euros more than the

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1. Estimated costs of producing the average Supremo bike (avg. unit costs, assuming a constant mix of models):
	Direct Materials	12	Euros more than the average Bissan bike
	Direct Labour	20%	higher than the average Bissan bike
	Variable Overhead	50%	of Direct Labour
	Total Fixed Overhead	7.087.500	(the "per bike" amount depends on production levels)

2. Unit price and annual volume:
MikRos has guaranteed an order of 24,000 mountain bikes and will pay an average price of EUR325.

3. Asset-related costs include:
Pretax cost of funds (interest to finance receivables or inventories)				18,0%
Effective tax rate				46,5%

4. Assumptions for Supremo related added inventories (average over the year) and cash:
Required Materials: 2 months' supply
Work in Process: 1,000 bikes, half completed for all cost categories
Finished Goods: 500 bikes awaiting next truckload shipment to MikRos warehouse
Goods in MikRos regional warehouse: Two months (on average) production
Accounts Receivable: Cash tied up due to the "net 30 days" policy

5. Cetin Ceviz's opinion on the effect on Bissan sales if proposal is accepted:
Some customers comparison shop for bikes, and some may purchase a challenger bike as a good value purchase.
My best guess is that our sales over the next year will be about 150,000 bikes a year if we forego the MikRos deal.
If we accept it, I think we we'll lose about 3,000 units of our regular sales over the year. These estimates do not include
the possibility that a few of our current dealers might drop our line if they find out we're making bikes for MikRos.

1 a)	From Bissan's balance sheet, what is their current debt/equity ratio?
b)	Bissan has the option of borrowing money from the bank. Their bank has a restriction on borrowing that does not allow a debt/equity greater than 1. Given their balance sheet at December 31, 2013, how much more money can Bissan borrow (on January 1, 2014) without violating this restriction?
c)	Suppose Bissan decides to borrow the 2,200,000 and produce the Supremo bikes, which in turn increases the total liabilities. After financing the project, how much more will Bissan be able to borrow in the future (for other needs) without violating the restriction?
2	Bissan is worried about cannibalization if they accept the deal; they fear the Supremo will compete with their regular Bissan bikes and hurt their sales. Assume that the contribution margin of the Supremo is 64.00 after deducting the interest charges and the contribution margin of the regular Bissan bike is 140.00. What is the maximum amount of cannibalization that Bissan can afford in their regular lines given the extra revenue generated by the MikRos deal? Answer in number of bikes.
3	Bissan expects to lose about 3,000 units of regular sales over the year if they accept the deal, and will decrease their production of regular bikes accordingly. Considering all the changes in sales, production levels, production costs, and interest costs, predict what the income statement will look like for next year if they accept the deal. Use the template below and report positive numbers.
a)	Revenue
b)	Cost of Goods Sold
c)	Gross Margin
d)	Selling and Administrative Expenses
e)	Income before taxes
f)	Income tax expense
g)	Net Income

Assets Liabilities and Owners' Equity Bank Indebtedness.. Accounts Payable.... Long-Term Loans Payable.. 1.897.000 879.000 1.191.000 Cash Accounts Receivable.. Raw Materials Inventory Work in Process Inventory Finished Goods... Plant and Equipment (net)... 254.000 1.701.000 1.004.000 1.298.000 2.543.000 4.001.000 Total Liabilities 3.967.000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6.834.000 10.801.000 Total Assets 10.801.000 BISSAN BIKE INC. Income Statement For the Year End - December 31, 2013 Production (Bikes) 150.000 Total Fixed Overhead 7.087.500 Per Bike Fixed Overhead* 47,25 *Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold. Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income ...... 54.750.000 (40.312.500) 14.437.500 (10.950.000) 3.487.500 (1.621.688) 1.865.813 Estimated costs of producing the average Bissan bike (avg. unit costs, assuming a constant mix of models): Direct Materials Direct Labour Variable Overhead (50% of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75 Assets Liabilities and Owners' Equity Bank Indebtedness.. Accounts Payable.... Long-Term Loans Payable.. 1.897.000 879.000 1.191.000 Cash Accounts Receivable.. Raw Materials Inventory Work in Process Inventory Finished Goods... Plant and Equipment (net)... 254.000 1.701.000 1.004.000 1.298.000 2.543.000 4.001.000 Total Liabilities 3.967.000 Shareholders' Equity Total Liabilities and Shareholders' Equity 6.834.000 10.801.000 Total Assets 10.801.000 BISSAN BIKE INC. Income Statement For the Year End - December 31, 2013 Production (Bikes) 150.000 Total Fixed Overhead 7.087.500 Per Bike Fixed Overhead* 47,25 *Per bike fixed overhead is based on production of 150,000 units Revenue Cost of Goods Sold. Gross Margin Selling and Administrative Expenses Income before taxes Income tax expense Net Income ...... 54.750.000 (40.312.500) 14.437.500 (10.950.000) 3.487.500 (1.621.688) 1.865.813 Estimated costs of producing the average Bissan bike (avg. unit costs, assuming a constant mix of models): Direct Materials Direct Labour Variable Overhead (50% of Direct Labour) Per Bike Fixed Overhead Estimated production cost per bike 127,00 63,00 31,50 47,25 268,75