Harrington: Cost and Variable Costs

Harrington Case Analysis Issue Stagnant sales performance has caused Harrington Collection to explore novel avenues for improved performance, including the launch of a new active-wear line. Recognizing an emerging trend of low price and rapid style turnover in the womens set securities industry, along with tremendous growth in the active-wear segment, Harrington ask to work strategically to capture this profitable market opport social unity. After careful analysis, it was determined that Harrington should implement a new active-wear line. Financial AnalysisWhile doing the financial analysis it is signifi pratt to calculate the unit price first. Using the wholesale price rather than the retail price, the calculated unit price is $95. Next, we sum up the start-up be and operating(a) costs, both fixed and variable, and use these numbers to calculate the breakeven units. After calculation, the breakeven point is 289,846 units. extension A shows the details of our process. Active-w ear sales are expected to double by 2009, and 40% of those sales are expected to be classified as check active-wear.Assuming that Harrington Vigor 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 of all apparel purchased is sold on sale. We accounted for these markdowns by assuming that half the units will be sold for bountiful price, and the other half will be sold at a deduction. A sensitivity analysis was conducted by calculating the discount rates at 20%, 40% and 60% separately. From Appendix B, we can see that even for the 60% discount rate, the profit margin is still up to 21%, which is quite attractive.Therefore, Harrington has strong financial forecast 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 the mature market to a low-cost and outsourcing comp etition area. Thus, majority of apparel companies choose to outsource their production in low-cost labor areas such as China. A nonher trend is the fast growing needs for the superior styling, fresh, and cutting-edge active-wears. Quality strengths and OpportunitiesHaving established their place in the1960s, Harrington became well known for its superior quality, knowledgeable sales staff, and designer styles. With fairly high loyalty customers, Harrington possesses premium nock 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 excellent 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 cutting-edge technology, Harrington has a substantia l opportunity to become a critical player in this profitable segment. communicate conflicts and Challenges By 2007 specialty stores and department stores are still the main retailing channels in the womens clothing market. Department stores may benefit by the lucrative inventory turnover rate produced by Harringtons extensive national advertising.Alternatively, department stores could be weary of stocking the active-wear products since this is a relatively new market and could mean more risk for the retailers. Harrington will need to rely on their relationships with the retailers and expertise in marketing to diminish this potential conflict. From the survey, the possibility to cheapen Harringtons brand is really trivial by launching a new active-wear line. Recommendation Despite 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 apply t he comfort and fashion image which the Vigor division has already formed into the new segment. In addition, by outsourcing the production in Mexico, it can not only decrease costs, but also provide the possibility to respond 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 Costs Start-up Costs ( underdrawers 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 Annual Depreciated Start-up Costs $ 2,540,000 Annual Ongoing direct 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) $ 500,000 Management/Support $ 1,000,000 Advertising $ 3, 000,000 Total Fixed Operating Costs $ 11,500,000 Direct 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 * measure 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 voice Wholesale price per unit $ 95. 00 Less total variable costs per unit $ 47. 00 Contribution per unit $ 48. 00 Breakeven Fixed annual costs(operating and depreciated start up) $ 14,040,000 Co ntribution 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 allowance* Discount Rate (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 $ 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.