Question

Schwinn is estimated to sell 400,000 bikes in the year;

Schwinn has 4 percent of the retail market;

Schwinn retailers markup bikes 20 percent;

Schwinn’s contribution margin is 25 percent;

The retail bike market has sales of $2.5 billion annually;

The investment was $50 million.

Evaluate Zell/ Chilmark’s decision to invest $50 million in Schwinn. What did it get for its money? Calculate the breakeven points and the payback period for this investment given the following assumptions: Schwinn has 4 percent of the retail bike market, Scwinn bikes are marked up an average 20 percent at retail, Schwinn has a 25 percent profit margin on its bikes.

Answer 1

When the whole bicycle market is worth $2.5 billion and Schwinn owns 4% of that market, then the annual retail sales equals $100,000,000 (=2.5 billion * 4% = $100,000,000)

When bikes are marked up an average of 20%, the$ sales as a manufacturer will amount to $80,000,000 (= $100 billion * 0.8 = $80,000,000)

When Schwinn has a 25% profit margin on its bikes and the sales worth are $80,000,000, profits will equal $20,000,000 (=0.25 * $80,000,000 = $20,000,000)

When Schwinn earns profits worth $20,000,000 per year, Zell/Chilmark will receive back the $50 million investment in 2.5 years. (=$50,000,000/$20,000,000 per year = 2.5 years), thus payback period is 2.5 years

As it has a 25% profit margin, thus would have to have sales worth $200,000,000. Breakeven = $50,000,000/0.25 = $200,000,000