Submitted by :- Anvit Vyas Submitted to:- Ms.
Mehak Bansal Subject:- Problem framing Date:- 19/03/2012 Pg- 20111213 Seminar Group 1 IILM, LR
Demand And Profitability Analysis of Harrington Collection
Start up Costs (in millions)
Start up Costs Pants Plant Start up costs Hoodie and Tee Shirt Plant Equipment Pants Plant Equipment Hoodie and T Shirt Launch PR- Advertising Fixtures For Company Stores Total Start Up Costs Annual Depreciated Start Up Costs (as depreciation rate is 20%) $ 1.2 $ 2.5 $2 $ 2.5 $2 $ 2.5 $ 12.70 $ 15.24
Annual Ongoing Operating Costs (in Millions)
Overhead Pants Plant Overhead Hoodie and Tee-shirt Plant Rent Pants Plant Rent Hoodie and Tee-shirt Plant Management/ Support Advertising Total Fixed Operating Cost $3 $ 3.5 $ 0.5 $ 0.5 $1 $3 $ 11.50
Direct Variable Costs ( in millions)
Sew and Press Cut Other Variable Labour Fabric Findings TOTAL
Hoodie
$ 3.25 $ 1.15 $ 3.20 $ 9.10 $ 3.85 $ 20.55
Tee-shirt
$ 2.00 $ 0.40 $ 2.40 $ 2.20 $ 0.50 $ 7.50
Pants
$2.85 $0.70 $3.05 $7.50 $2.30 $16.4
Direct Variable Costs translated into Unit cost:- (in millions) Hoodie
$ 20.55*0.5= 10.275
Tee-shirt
$ 7.50*1.5= 11.25
Pants
$ 16.4*1= 16.4
Indirect Variable Costs (in millions)
Wholesale unit price $ 95
Total Variable cost as % of wholesale Price 49.02 Indirect Variable Costs per Unit Direct variable costs per unit Indirect Variable costs per unit Total Variable Cost per unit CONTRIBUTION Wholesale price per unit Less total variable costs per unit Contribution per unit BREAKEVEN $ 95 $ 46.57 $ 48.43 $ 8.64 $37.925 $ 8.64 $ 46.57
Fixed annual costs( operating and depreciated start up) = $ 2.54+11.50= $ 14.04 Divided by contribution per unit = $ 48.43 Breakeven units = 0.26 PROFIT MARGINS Revenue $ 39.9 ( as double revenue, then 405 of it is in better section and c means 7% of this 40% share) Less fixed annual costs $ 14.04 Less Total Variable Costs Profit Before Tax = Profit Margin Before Tax Case Analysis Q1. What is the potential competitive reaction? Every new product launch will force your competitors to start planning strategies for the launch of their own design of the product which could perpetuate market existence for them at the cost of loss of your market share. Therefore there will always be high potentiality of competitive reaction. Q2. Will both department and speciality stores enthusiastically support this new product line? Certainly yes as margins of profit will be higher as well a new customer base would be visible for these stores too. Q3. Can active wear be introduced in the existing vigor division or should a new brand division be created? If the question is about possibility then active wear can certainly be continued in the Vigor brand set but if the question is about necessity then active wear shoul be launched as new product as it will lead to expansion of customer base aswell as market penetration along with share would tend ti increase. Q4. What sales are needed to break even? 0.26 million units Q5. Is this attainable? $ 46.57 *0.42= 19.80 $ 6.06 $ 16.66%
Yes, it is to a certain extent because there has been other costs such as advertising and PR as well which would enhance the existing brand image of the product and a new product would mean addition of more customers to the already existing customer base which would increase sales and in turn profits. Q6.Can we achieve the sales needed to capture an attractive profit margin? Yes the company can but it will have to pre judge its competitors and their policies, carry out a swot analysis as well as a PESt analysis. Like in Q3, a situation of recession has been given.
In March 2008, Huey thought that Harrington could be ready to launch a new active wear line by January 1, 2009. By the end of September 2008 recession hit US economy badly. On a real time basis, how would this new situation possibly change Harrington's focus on framing the problem of "drop in sales and profit" and solving it? Now, when a recession hits any economy it leads to slowdown In growth as a result of massive reduction in aggregate demand. Also it leads to massive unemployment as companies tend to reduce the excess cost borne by them. In such a situation the launching of a new product could be stalled for a while till the recession ends. Another situation could be that of a risk taker where the launch of this new product takes place. In such a situation he will have to bring it in very high end products as the demand for luxury products will not decline even at time of recession. He will also have to manage holistically his human resources as well as go in for advantageous mergers to launch this product. Even methods of speculation and massive promotions could be a win win situation as it might incur cost increase in the short run but it could be profitable for long run.
