Quantitative Analysis & Excel

Case Study

Data

Table 1
	Fashion Designs International, Inc.
	Comparative Income Statements
			year ended December 31,
			2014	2015	2016
		Sales	$1,987,050	$2,124,885	$2,249,830
		Cost of Goods Sold:
		Fabric	237,250	250,390	264,260
		Cutting	201,500	212,660	224,440
		Sewing	260,000	274,400	289,600
		Brand labels	3,900	4,116	4,344
		Thread etc.	650	686	724
		Shipping and freight	29,250	30,870	32,580
		Total Cost of Goods Sold	732,550	773,122	815,948
		Gross Profit	1,254,500	1,351,763	1,433,882
		Operating Expenses:
		Bank charges	1,260	1,260	1,320
		Salary expense	350,000	360,000	370,500
		Wage expense	263,250	291,722	323,275
		Employee benefits - salaried employees	63,000	64,800	66,690
		Employee benefits - hourly employees	31,590	35,007	38,793
		Insurance	22,450	22,450	23,124
		Information Technology services	8,220	8,340	8,520
		Legal fees	15,000	18,840	20,280
		Licenses and permits	5,400	5,400	5,400
		Meals and entertainment	14,304	15,019	15,925
		Printing and reproduction	1,452	1,740	1,860
		Professional Fees	15,504	16,260	16,920
		Marketing and promotion	30,996	34,104	30,996
		Rent - Office	36,996	36,996	37,380
		Rent - Warehouse	41,004	42,234	42,234
		Repairs and maintenance	8,592	7,380	10,188
		Security expense	2,100	2,100	2,184
		Office supplies	2,136	2,532	2,844
		Telephone and internet	2,472	2,604	2,808
		Vehicle expenses	5,760	5,875	6,051
		Travel expenses	21,000	21,210	21,846
		Utilities	1,956	2,034	2,156
	Total operating expenses		944,442	997,907	1,051,295
	Profit before taxes		310,058	353,856	382,587
		Income taxes	93,017	106,157	114,776
	Profit after taxes		$217,041	$247,699	$267,811
Table 2
		Fashion Designs International, Inc.
		Assumptions for Income and Expense Projections
		Expense Item	F/V (1a)	Formula	2016 amount (1b)	Projected annual growth	Effect of overseas move
		Cost of Goods Sold:
		Fabric (2)	V	units sold (6) x VC per unit	$7.30000	3.00%	-50%
		Cutting (2)	V	units sold (6) x VC per unit	$6.20000	3.00%	-50%
		Sewing (3)	V	units sold (6) x VC per unit	$8.00000	3.00%	-50%
		Brand labels (4)	V	units sold (6) x VC per unit	$0.12000	3.00%	-50%
		Thread etc. (1)	V	units sold (6) x VC per unit	$0.02000	3.00%	-50%
		Shipping and freight (5)	V	units sold (6) x VC per unit	$0.90000	3.00%	300%
		Operating Expenses:
		Bank charges	F	fixed monthly cost x 12	$1,320	1.5%	0%
		Sal exp - owner	F	fixed annual cost x 1	$150,000	0.0%	0%
		Sal exp - employees	F	fixed annual cost x 1	$220,500	2.0%	0%
		Wage expense	V	units produced x VC per unit	$8.93025	2.0%	-20%
		Emp benis - sal	F	salary expense x percentage	$66,690	same %	0%
		Emp benis - hrly	V	wage expense x percentage	$1.07163	same %	0%
		Insurance	F	fixed annual cost x 1	$23,124	1.5%	250%
		IT services	F	fixed monthly cost x 12	$8,520	1.5%	0%
		Legal fees	F	fixed monthly cost x 12	$20,280	1.5%	200%
		Lic & Permits	F	fixed monthly cost x 12	$5,400	1.5%	75%
		Meals and entertainment	F	fixed monthly cost x 12	$15,925	1.5%	0%
		Printing and reproduction	F	fixed monthly cost x 12	$1,860	1.5%	0%
		Professional Fees	F	fixed monthly cost x 12	$16,920	1.5%	0%
		Marketing and promotion	F	fixed monthly cost x 12	$30,996	1.5%	0%
		Rent - Office	F	fixed monthly cost x 12	$37,380	1.5%	0%
		Rent - Warehouse	F	fixed monthly cost x 12	$42,234	1.5%	0%
		Repairs and maintenance	F	fixed monthly cost x 12	$10,188	1.5%	20%
		Security expense	F	fixed monthly cost x 12	$2,184	1.5%	0%
		Office supplies	F	fixed monthly cost x 12	$2,844	1.5%	0%
		Telephone and internet	F	fixed monthly cost x 12	$2,808	1.5%	0%
		Vehicle expenses	F	fixed monthly cost x 12	$6,051	1.5%	0%
		Travel expenses	F	fixed quarterly cost x 4	$21,846	1.5%	400%
		Utilities	F	fixed monthly cost x 12	$2,156	1.5%	0%
	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%

Student Template

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.