Description
2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2
Unformatted Attachment Preview
Unit 3_Fashion Designs International, Inc..pdf
Table 1
Fashion Designs International, Inc.
Comparative Income Statements
Sales
Cost of Goods Sold:
Fabric
Cutting
Sewing
Brand labels
Thread etc.
Shipping and freight
Total Cost of Goods Sold
Gross Profit
Operating Expenses:
Bank charges
Salary expense
Wage expense
Employee benefits – salaried employees
Employee benefits – hourly employees
Insurance
Information Technology services
Legal fees
Licenses and permits
Meals and entertainment
Printing and reproduction
Professional Fees
Marketing and promotion
Rent – Office
Rent – Warehouse
Repairs and maintenance
Security expense
Office supplies
Telephone and internet
Vehicle expenses
Travel expenses
Utilities
Total operating expenses
Profit before taxes
Income taxes
Profit after taxes
2014
$1.987.050
year ended December 31,
2015
$2.124.885
237.250
201.500
260.000
3.900
650
29.250
732.550
1.254.500
250.390
212.660
274.400
4.116
686
30.870
773.122
1.351.763
1.260
350.000
263.250
63.000
31.590
22.450
8.220
15.000
5.400
14.304
1.452
15.504
30.996
36.996
41.004
8.592
2.100
2.136
2.472
5.760
21.000
1.956
944.442
310.058
93.017
$217.041
1.260
360.000
291.722
64.800
35.007
22.450
8.340
18.840
5.400
15.019
1.740
16.260
34.104
36.996
42.234
7.380
2.100
2.532
2.604
5.875
21.210
2.034
997.907
353.856
106.157
$247.699
Table 2
Fashion Designs International, Inc.
Assumptions for Income and Expense Projections
Expense Item
Cost of Goods Sold:
Fabric (2)
Cutting (2)
Sewing (3)
Brand labels (4)
Thread etc. (1)
Shipping and freight (5)
F/V (1a)
Formula
V
V
V
V
V
V
units sold (6) x VC per unit
units sold (6) x VC per unit
units sold (6) x VC per unit
units sold (6) x VC per unit
units sold (6) x VC per unit
units sold (6) x VC per unit
F
F
F
V
F
V
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
fixed monthly cost x 12
fixed annual cost x 1
fixed annual cost x 1
units produced x VC per unit
salary expense x percentage
wage expense x percentage
fixed annual cost x 1
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed monthly cost x 12
fixed quarterly cost x 4
fixed monthly cost x 12
Operating Expenses:
Bank charges
Sal exp – owner
Sal exp – employees
Wage expense
Emp benis – sal
Emp benis – hrly
Insurance
IT services
Legal fees
Lic & Permits
Meals and entertainment
Printing and reproduction
Professional Fees
Marketing and promotion
Rent – Office
Rent – Warehouse
Repairs and maintenance
Security expense
Office supplies
Telephone and internet
Vehicle expenses
Travel expenses
Utilities
1a F = fixed cost; V = variable cost;
1b for variable (V): amount per unit; for fixed (F): annual amount
2 cost paid on per yard basis ;
3 cost paid on per piece basis
4 cost paid on per label basis ;
5 cost paid on weight and volume basis
6 units sold and units produced both projected to grow at annual rate of 6%
mber 31,
2016
$2.249.830
264.260
224.440
289.600
4.344
724
32.580
815.948
1.433.882
1.320
370.500
323.275
66.690
38.793
23.124
8.520
20.280
5.400
15.925
1.860
16.920
30.996
37.380
42.234
10.188
2.184
2.844
2.808
6.051
21.846
2.156
1.051.295
382.587
114.776
$267.811
Projected
annual
growth
Effect of
overseas
move
$7,30000
$6,20000
$8,00000
$0,12000
$0,02000
$0,90000
3,00%
3,00%
3,00%
3,00%
3,00%
3,00%
-50%
-50%
-50%
-50%
-50%
300%
$1.320
$150.000
$220.500
$8,93025
$66.690
$1,07163
$23.124
$8.520
$20.280
$5.400
$15.925
$1.860
$16.920
$30.996
$37.380
$42.234
$10.188
$2.184
$2.844
$2.808
$6.051
$21.846
$2.156
1,5%
0,0%
2,0%
2,0%
same %
same %
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
1,5%
0%
0%
0%
-20%
0%
0%
250%
0%
200%
75%
0%
0%
0%
0%
0%
0%
20%
0%
0%
0%
0%
400%
0%
2016 amount
(1b)
Fashion Designs International, Inc
Global Assumptions:
.
2016
units sold
36.200
units produced
36.200
avg sales price
$62,15
income tax rate
30%
benefits – salary
18,0%
benefits – wages
12,0%
Desired Cash Payout
(a) – Calculate Total Variable Costs
Total variable costs
(b) – Calculate Total Fixed Costs
Total fixed costs
(c) – Calculate Contribution Margin per Unit
Sales price per unit
Variable costs per unit (a)
Contrib margin per unit
(d) – Calculate Break-Even, Unit Sales
Fixed costs (b)
÷ CM/U
Unit sales, BEP
(e) – Calculate Target Profit
Desired cash payout to owner (from
scenario)
Subtract owner salary
Target profit after taxes
÷ 100% less income tax rate
Target profit before taxes
Fixed costs
FC + target profit
÷ CM/U
Unit sales, target profit
Adapted from IMA
IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 4, ART. 2, DECEMBER 2018
ISSN 1940-204X
Fashion Designs International, Inc
.
George Gonzalez, PhD, Assistant Professor Accounting
University of Lethbridge–Calgary Campus
Calgary, Alberta, Canada
INTRODUCTION
“Balancing quantitative and qualitative factors can be quite a challenge,” Charles Riley thought to himself. Riley
is the CFO of Fashion Designs International, Inc. (FDI), a small women’s apparel business. The CEO and sole
shareholder of FDI, Alina Rossi, had asked Riley for suggestions about how to increase the company’s profits
to the level that matched her financial goals. Riley knew, however, that there were qualitative factors of
importance to Rossi that posed challenges.
FDI, based in Greensboro, North Carolina, manufactures and distributes women’s apparel to retailers
worldwide under the brand name RossiDesigns. Headed by Rossi, an Italian-educated, award-winning fashion
designer with a high work ethic and a perfectionist streak, the company’s products are considered of excellent
quality by consumers and retailers. The designs, fabric, and processes used in production all contribute to this
high level of quality. Since its inception in 2001, the company has grown steadily to annual sales of US$2.25
million in 2016 (see Table 1).
ALINA ROSSI, FASHION DESIGNER
Alina Rossi studied fashion design in Italy and, upon completing her studies, moved back to the United States
where her family had emigrated when she was 10 years old. Rossi was a highly creative designer who almost
certainly could have done well by selling her designs to large international fashion companies but chose
instead to start her own company.
Rossi started her fashion business in 2001 by selling women’s apparel to small U.S.-based boutique shops.
Her designs—particularly popular with women in their 20s, 30s, and 40s—sold quickly, and her business grew
accordingly. After several years, her market expanded to include Canada, Mexico, and a few countries in
Europe.
Rossi tends to be a perfectionist both with her designs and in her insistence on high production quality. This
manifests itself in her close supervision of production processes, to a point of near-obsession with ensuring the
high apparel standards that she demands.
APPAREL PRODUCTION
The production of FDI’s products is composed of three major phases: (1) manufacturing the fabric to be used
for apparel pieces, (2) cutting the fabric according to the particular apparel piece’s design, and (3) sewing the
cut fabric into apparel wear. FDI’s women’s outfits are made from high-quality fabric, which Rossi specifies to
the fabric manufacturer, a company based in Toronto, Ontario, Canada. Large rolls of fabric manufactured for
FDI are shipped to FDI’s warehouse in Greensboro, where they are stored until ready to be used in production
runs. At such time, fabric is sent to the cutting shop where the fabric is cut into large pieces of specific size and
shape, as specified by Rossi’s design. Finished cut pieces are then delivered to the sewing shop. In the sewing
process, cut pieces are sewn as prescribed by Rossi into final products, which is then transported to FDI’s
warehouse until ready for shipment to retailers (for instance, FDI’s main customers). The cutting and sewing
shops, independent from each other, are both located within a 50-mile radius of FDI’s main offices in
Greensboro.
A separate company, RossiDesigns LLC, owns the RossiDesigns brand name and trademarks. Rossi assigns
all of her designs to RossiDesigns LLC. As apparel pieces are distributed to retailers, FDI pays a royalty to
RossiDesigns LLC for the right to use the designs and the RossiDesigns brand name.1 The RossiDesigns label
is sewn into each piece that FDI produces.
FDI PROFITABILITY
FDI’s profitability is attributable to a lean company structure and Rossi’s talents and work ethic. The company,
however, has not achieved the level of profitability that Rossi desires. While her goal is an annual net cash
payout from the company of US$600,000, currently the net cash paid or available to her (for instance,
combined salary and net profit) is only about two-thirds that amount.2
RILEY’S RESEARCH AND PREPARATION
As mentioned previously, all of FDI’s production activities are in North America: The fabric is produced in
Canada, and the cutting and sewing are done in the United States. Riley believes that the quickest and surest
way for FDI to increase its profitability is by moving manufacturing activities overseas to a low-cost country
where labor and other production costs would be significantly reduced.3 Based on his prior research, Riley has
estimated how the company’s costs would change if all manufacturing was moved overseas (see Table 2). He
has prepared a schedule of revenue and expense growth rates that allow him to project future net profits under
either scenario—for instance, keeping manufacturing in North America or moving it overseas (see Table 2,
“Projected Annual Growth” column). Riley determined the cost behavior of each item of expense based on cost
drivers and used this information to arrive at formulas for projecting each expense item (see Table 2, “Formula”
column).
Riley believes that it is in the company’s best interest to move production overseas and that this course of
action is the best way to reach Rossi’s goals for the company. He recognizes, however, that a big challenge in
convincing Rossi of this is her strong desire for close supervision of all production processes. Riley knows that
Rossi is a perfectionist, and he believes that other related aspects of Rossi’s personality represent potential
hurdles to an overseas move. Fashion design is, at its essence, an artistic skill. As with many artists, Rossi
probably views her company’s final product as an extension of herself. Riley imagines that Rossi’s pride and
ego are significant factors in her strong need for oversight and her obsession with production quality.
Riley knows that he will have to keep Rossi’s personality factors in mind if he is to have a good chance of
convincing her to move the company’s production overseas. When he meets with Rossi, Riley’s challenges
include helping her focus on her financial goal, convincing her that achieving those goals will require tradeoffs
in production supervision, and convincing her that the tradeoffs will be well worth it.
Purchase answer to see full
attachment
Tags:
decision making
accounting
qualitative analysis
User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.
Reviews, comments, and love from our customers and community: