Harrington: Cost and Variable Costs

Harrington Case Analysis Issue Stagnant gross gross revenue performance has ca habitd Harrington Collection to explore late avenues for improved performance, including the launch of a new active-wear line. Recognizing an emerging burn of low cost and rapid name turnover in the womens fit out merchandise, along with tremendous step-up in the active-wear segment, Harrington needs to work st respectgically to capture this profitable marketplace luck. after(prenominal) careful analysis, it was determined that Harrington should implement a new active-wear line. pecuniary AnalysisWhile doing the financial analysis it is important to calculate the unit of measurement hurt first. exploitation the wholesale price rather than the retail price, the calculated unit price is $95. Next, we sum up the start-up cost and operating cost, both fixed and variable, and use these numbers to calculate the breakeven units. After calculation, the breakeven point is 289,846 units. accessory A shows the expatiate of our process. Active-wear sales are awaited to double by 2009, and 40% of those sales are expected to be classified as better active-wear.Assuming that Harrington vim maintains their 7% market share, we can deduce that Vigor can expect to sell 420,000 units of active-wear in its first year. Over half(prenominal) of all apparel purchased is sell on sale. We accounted for these markdowns by assuming that half the units will be sold for full price, and the other half will be sold at a discount. A sensitivity analysis was conducted by cipher the discount rates at 20%, 40% and 60% separately. From Appendix B, we can see that even for the 60% discount rate, the profit border is soothe up to 21%, which is quite attractive.Therefore, Harrington has strong financial visualise to support its new launch in active-wear segment. Market trend After the economic downturn in the early 2000s, the trend of price-sensitive and more than 50% discount sales volume drive t he mature market to a low-cost and outsourcing competition area. Thus, majority of apparel companies choose to outsource their achievement in low-cost drudge areas such as China. A nonher trend is the fast growing needs for the superior styling, fresh, and fashionable active-wears. Quality strengths and OpportunitiesHaving accomplished their brand in the1960s, Harrington became well known for its superior quality, knowledgeable sales staff, and designer styles. With fairly high loyalty customers, Harrington possesses premium brand reputation. In addition, donning Harrington labels represents an instant status upgrade and the cutting edge of fashion. Generally speaking, the active-wear market is a rapid growth field with a relatively scummy segment in the better category. In order to seize the opportunity for diversity in its marketshare, Harrington should enter the market as soon as possible.Considering its brand influence and exceptional quality and styling, together with its c utting-edge technology, Harrington has a substantial opportunity to become a critical player in this profitable segment. Channel conflicts and Challenges By 2007 specialty stores and department stores are still the main retailing channels in the womens clothing market. incision stores may benefit by the lucrative inventory turnover rate produced by Harringtons extensive national advertising.Alternatively, department stores could be become flat of stocking the active-wear products since this is a relatively new market and could mean more find for the retailers. Harrington will need to rely on their relationships with the retailers and expertise in merchandising to diminish this potential conflict. From the survey, the possibility to cheapen Harringtons brand is truly trivial by launching a new active-wear line. Recommendation notwithstanding the conflicts and challenges, Harrington has a significant opportunity to advance their business into the active-wear segment.By upscaling the active-wear into the better category, Harrington could break the comfort and fashion image which the Vigor division has already make into the new segment. In addition, by outsourcing the production in Mexico, it can not only decrease costs, but also provide the possibility to reply more swiftly to changes in demand. With this in mind, it is strongly suggested that Harrington launches a new active-wear line. Appendix A Start Up cost Start-up Costs ( gasp Plant) $ 1,200,000 Start-up Costs (Hoodie and Tee-shirt Plant) $ 2,500,000 Equipment (Pants Plant) $ 2,000,000 Equipment (Hoodie and Tee-shirt Plant) $ 2,500,000 Launch-PR, Advertising $ 2,000,000 Fixtures for Company Stores $ 2,500,000 Total Start-up Costs $ 12,700,000 yearly Depreciated Start-up Costs $ 2,540,000 Annual Ongoing Operating Costs-Fixed Overhead (Pants Plant) $ 3,000,000 Overhead (Hoodie and Tee-shirt Plant) $ 3,500,000 Rent (Pants Plant) $ 500,000 Rent (Hoodie and Tee-shirt Plant) $ 5 00,000 counsel/Support $ 1,000,000 Advertising $ 3,000,000 Total Fixed Operating Costs $ 11,500,000 position Variable Costs Hoodie Tee-shirt Pants Sew and press $ 3. 25 $ 2. 00 $ 2. 85 Cut $ 1. 15 $ 0. 40 $ 0. 70 Other variable labor $ 3. 20 $ 2. 40 $ 3. 05 Fabric $ 9. 10 $ 2. 20 $ 7. 50 Findings $ 3. 85 $ 0. 50 $ 2. 30 Total Variable Cost $ 20. 55 $ 7. 50 $ 16. 40 Direct variable costs translated into unit cost Hoodie Tee-shirt Pants Total Variable Cost $ 20. 55 $ 7. 50 $ 16. 40 * esteem 0. 5 1. 5 1. 0 Unit Cost $ 10. 28 $ 11. 25 $ 16. 40 Indirect variable costs Wholesale unit price $ 95. 00 Total variable costs as % of wholesale price 40% Indirect variable costs per unit $ 8. 64 Direct variable costs per unit $ 37. 93 Indirect variable costs per unit $ 8. 64 Total variable costs per unit $ 46. 56 piece Wholesale price per unit $ 95. 00 Less total variable costs per unit $ 47. 00 parting per unit $ 48. 00 Breakeven Fixed annual costs (operating and depreciated start up) $ 14,040,000 Contribution per unit $ 48. 00 = Breakeven Units $ 289,846 Appendix BUnit Price = $95. 00, Unit Quantity = 210,000 * ((7,500,000 * 2 * 0. 4 * 7%) / 2) Profit Margin* Discount swan (40%) Discount Rate (20%) Discount Rate (60%) Revenue $ 31,920,000 $ 35,910,000 $ 27,930,000 less fixed annual costs $ 2,540,000 $ 2,540,000 $ 2,540,000 less total variable costs $ 19,555,410 $ 19,555,410 $ 19,555,410 Profit before tax revenue $ 9,824,590 $ 13,814,590 $ 5,834,590 Profit margin before tax 30. 78% 38. 47% 20. 89% * Assumes half of inventory is sold at full price, and other half is sold at subsequent discount rates.