Consider the following problem that the CEO of Fashion Company is trying to resolve. The company has seen a decline over the past three years in sales of its Basic Line of clothing, which are clothing items priced under $200. At the same time, there has been an increase in sales of the company’s Exclusive Line of clothing, which are items priced at $200 or more. The company’s profits have also been decreasing over the past three years. The CEO is trying to figure out what to do. She suspects that the problem with profits is due to the shift in sales away from the Basic Line and toward the Exclusive Line. Assume that you are an external consultant for a Fashion Company. Provide suggestions to the executive with regard to the following points.

REQUIRED:

1. a. How can the executive identify how much the Basic Line and the Exclusive Line are contributing to profits? What steps might this involve?

2. b. Could it be that the shift in sales from the Basic Line toward the Exclusive Line is not the reason for the decrease in profits? If so, what other reasons could there be for the decrease in profits?

3. c. The CEO decides that she needs to increase sales in the Basic Line and that she will do this by paying salespeople a bonus that is based on whether the company meets a quarterly sales target for the Basic Line. Critically evaluate the CEO’s decision. As part of your answer, explain possible problems with this type of bonus that is based on companywide performance. Suggest alternative approaches to motivating salespeople that might be helpful for her to consider.

Answer rating: 100% (QA)

Solution a By preparing income statement of both basic and executive line of clo... View the full answer