Flash Fashions plc has had a difficult nine months and the management team is discussing strategy for the final quarter.
In the last nine months the company has survived by cutting production, reducing staff and reducing overheads wherever possible. However, the share market, whilst recognizing that sales across the industry have been poor, has worried about the financial strength of the business and as a result the share price has fallen 40%.
The company is desperate to increase sales. It has been recognized that the high fixed costs of the factor y are not being fully absorbed by the lower volumes which are costed at standard cost. If sales and production can be increased then more factor y costs will be absorbed and increased sales volume will raise staff morale and make analysts think the firm is entering a turnaround phase.
The company decides to drop prices by 15% for the next two months and to change the terms of sale so that property does not pass until the clothes are paid for. This is purely a reflection of the tough economic conditions and the need to protect the firm against customer insolvency. Further, it is decided that if sales have not increased enough by the end of the two months, the company representatives will be advised to ship goods to customers on the understanding that they will be invoiced but if they don’t sell the goods in two months they can return them. Volume discounts will be stressed to keep the stock moving.
These actions are intended to increase sales, increase profitability, justify higher stocks, and to ensure that more overheads are transferred out of the profit statement into stocks.
For the purposes of annual reporting it was decided not to spell out sales growth in financial figure terms in the managing director’s report but rather to focus on units shipped in graphs using scales (possibly log scales) designed to make the fall look less dramatic. Also comparisons will be made against industry volumes as the fashion industry has been more affected by economic conditions than the economy as a whole.
To make the ratios look better, the company will enter into an agreement on the last week of the year with a two-dollar company called Upstart Ltd owned by Colleen Livingston, friend of the managing director of Flash Fashions, Sue Cotton. Upstart Ltd will sign a contract to buy a property for £30 million from Flash Fashions and will also sign promissory notes payable over the next three quarters for £10 million each. The auditors will not be told, but Flash Fashions will enter into an agreement to buy back the property for £31 million any time after the star t of the third month in the new financial year.

Required:
Critically discuss each of the proposed strategies.