The Baldwin Company: An Example
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“The Baldwin Company, originally established 16 years ago to make footballs, is now a leading
producer of tennis balls, baseballs, footballs, and golf balls. Nine years ago, the company
introduced “High Flite,” its first line of high-performance golf balls. Baldwin management has
sought opportunities in whatever businesses seem to have some potential for cash flow. Recently
W. C. Meadows, vice president of the Baldwin Company, identified another segment of the sports
ball market that looked promising and that he felt was not adequately served by larger
manufacturers. That market was for brightly colored bowling balls, and he believed many bowlers
valued appearance and style above performance. He also believes that it would be difficult for
competitors to take advantage of the opportunity because of both Baldwin’s cost advantages and
its highly developed marketing skills.
As a result, the Baldwin Company investigated the marketing potential of brightly colored
bowling balls. Baldwin sent a questionnaire to consumers in three markets: Philadelphia, Los
Angeles, and New Haven. The results of the three questionnaires were much better than expected
and supported the conclusion that the brightly colored bowling balls could achieve a 10 to 15
percent share of the market. Of course, some people at Baldwin complained about the cost of the
test marketing, which was $250,000.
In any case, the Baldwin Company is now considering investing in a machine to produce
bowling balls. The bowling balls would be manufactured in a warehouse owned by the firm and
located near Los Angeles. This warehouse, which is vacant, and the land can be sold for $150,000
after taxes.
Working with his staff, Meadows, is preparing an analysis of the proposed new product.
He summarizes his assumptions as follows: The cost of the bowling ball machine is $100,000 and
it is expected to last five years. At the end of five years, the machine will be sold at a price
estimated to be $30,000. Production by year during the 5-year life of the machine is expected to
be as follows: 5,000 units, 8,000 units, 12,000 units, 10,000 units, and 6,000 units. The price of
bowling balls in the first year will be $20. The bowling ball market is highly competitive, so
Meadows believes that the price of bowling balls will increase at only 2 percent per year, as
compared to the anticipated general inflation rate of 5 percent. Conversely, the plastic used to
produce bowling balls is rapidly becoming more expensive. Because of this, production cash
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This note is cited directly from Corporate Finance, 12th International Student Edition, page 172-173, Copyright © 2019
McGraw-Hill. This note is used solely for in-class demonstration purpose along with the lecture nots, and cannot be
circulated without the permission from McGraw-Hill.