Refer to the Paige’s Fashion House case in self-study problem 1.

Paige ensures that members of her staff regularly attend international fashion shows (for design ideas) as well as become involved in Australian fashion shows. While these are costly events to attend, Paige considers it a necessary function of her business as it is important to maintain a high profile as an up-and-coming design group.

The design team always works in advance, designing garments for the following season. A considerable proportion of their time is spent working on the formal collection. The formal garments are recognised in the industry as the haute couture range, highly expensive and exotic garments. They bring the ‘wow’ factor to the fashion parades. Paige often dresses celebrities attending high-profile events, such as the Logies, the Brownlow, DallyM and Allan Border medal presentations, and other Australian sports awards nights, in her latest formal range. The formal range is the signature style from which the other regular streetwear designs (that is, the casual and denim ranges) are created.

The streetwear range is the main income earner for Paige’s Fashion House. Her design team also designs shoes and bags to match every season’s range. These are made for Paige’s Fashion House by a high-quality Chinese manufacturing company. The large expense items are the fashion show costs, advertising expenses and the costs of preparing sample garments for fashion parades and celebrity wear. Distribution is generally through a local transport company who deliver small and large orders.

Paige’s Fashion House sells its range in about 20 fashion outlets around Australia. Two are very large national department stores and the other 18 are fashion boutiques of varying sizes. Credit terms vary depending on the size of the store. The large department stores manage to stretch payment terms to 120 days, which is tough on cash flows; however, Paige tries to make it up with large deposits on order and 30-day balance payment terms for the smaller boutiques. She tries to extend her own accounts payable as much as she can, but given it is not a large organisation, she has trouble securing credit terms beyond 30 days. The company has to pay a considerable proportion of costs up-front to the bag and shoe manufacturer.

The company needs some inventories of raw materials (fabrics, threads, other) well ahead of time to ensure it can supply once the product range is launched. This is also necessary for the bags and shoes, which are ordered and shipped in advance. Otherwise, finished goods inventory levels are kept relatively small for two reasons. First, much of a new season’s range is shipped to stores. Second, unsold inventory is mostly donated or heavily discounted to outlets providing high-quality clothing labels to charities.

The following spreadsheet provides an overview of the new spring collection product range and some key financial information.

Required

Paige has asked your assistance on a consulting basis. She is seeking advice as to the direction of her business (strategy) and best course of action in terms of product emphasis going forward. She is pleased with the success of the company to date, but is fully aware of the changing dynamics of the industry. What would you advise? In particular what would you advise with respect to: 

(a) A mechanism for assigning expenses to the different product ranges to better assess product profitability

(b) Strategic direction and possible courses of action going forward, including impact on key financials (strategic budgeting)

(c) the capacity of the company to meet key financial targets into the future?

Transcribed Image Text:

Paige's Fashion House – Spring Collection Fashion line Jeans Casual Formal Accessories Total Bags Shoes No. of new lines 8 10 6 4 8 Statement of profit or loss key items Total sales $320 000 $640 000 $90 000 $216 000 $120 000 $1 386 000 Total cost of sales 224 000 448 000 85 500 172 800 96 000 1 026 300 Gross income 96 000 192 000 4 500 43 200 24 000 359 700 Expenses R&D 53 955 Marketing 28 776 Fashion shows 89 925 Cost of sample garments Advertising 17985 53 955 Distribution 26978 General & administration 35970 Total other expenses 307 544 Net income 52 156 64 000 54 000 15 000 Average sales per line Average cost of sales per line Gross margin % (target = 30%) Expenses % of sales (target = 20%) Net income margin (target = 10%) 40 000 15 000 28 000 44 800 14 250 43 200 12 000 0.3% 0.3% 0.05% 0.2% 0.2% 0.259 523 81% 0.221 892 857 0.037 630 952 Balance sheet items Current assets $ 123 156 Inventory (% of cost of sales) Accounts receivable (as a % of sales) 346 500 Current liabilities Accounts payable (as a % of cost of sales) Shareholders' equity Return on shareholders' equity (target = 8%) 205 260 920 000 0.056 691 848