Introduction
Trina and Cora Smith’s Fit Apparel (FA), a privately held business, sells premium training apparel throughout Canada and the United States. FA’s typical consumer is a lady between the ages of 25 and 45 who loves to exercise and shop; as such, FA’s clothing is priced at a premium. A national organization that promotes women’s health has contacted FA and asked FA to produce 1 million cycling shirts for its yearly cycling event.
Issue
Should FA accept the offer to manufacture 1 million cycling jerseys for the national charity, considering the additional costs and potential loss in profit? The question is whether the potential revenue from this one-time order is sufficient to cover the extra costs of purchasing the screen print machine, set-up costs, and manufacturing the jerseys. Ethically, the question stands whether accepting the offer aligns with FA’s corporate philosophy and values.
Critical Success Factors and Constraints
The primary success factors in the case of FA include producing premium fitness apparel, providing outstanding customer service, and using enthusiastic and educated independent consultants to advertise the items. The brand appeals to customers willing to pay more for luxury workout apparel by pricing all clothing at a total cost plus 60% and not giving any sales. This pricing strategy does, however, impose a limitation because not everyone can afford to join the FA “club.” Furthermore, products that don’t sell end up going to waste, which might cause problems with inventory control.
Alternatives
After the one-time order, the potential options for FA are the following:
- Accept the charity order for 1 million cycling jerseys.
- Reject the charity order.
Analysis
Qualitative Information
Accepting the offer has benefits and drawbacks, but FA’s long-term corporate objectives and values will ultimately determine whether FA takes the offer. Accepting it would necessitate a substantial upfront investment and reduce profit margins, but it could result in favorable media and enhanced brand recognition. However, declining the offer can result in bad press and losing potential clients who value social causes.
Quantitative Information
Whether to accept or reject the one-time order should be evaluated quantitatively using the relevant costing methodology. The only expenses and revenues connected with a particular decision relevant to costing are those incremental (“Chapter 9,” 2013, slide 12). In this case, the incremental cost of accepting the order would include set-up costs ($0.025), the material cost ($10.46), direct labor cost ($6.08), and variable overhead cost ($5.33) per jersey.
Therefore, the total incremental cost per jersey would be $21.895 and $21,895,000 for all produced jerseys. Thus, the incremental gross profit, resulting from the total incremental cost being subtracted from the revenue from selling one million jerseys for $30, would equal $8,105,000. This shows that the order is financially viable despite the modest offered profit margin.
Conclusion and Recommendation
In conclusion, FA is advised to reject the one-time order after weighing the qualitative and quantitative factors. The choice was made in light of several considerations, such as the cost of a screen-printing machine, the set-up expenses, the additional labor and machine hours needed, and the slim profit margin from the suggested price of $30 per jersey by the charity.
To offset potential income loss, the FA can look into alternative strategies to assist women in their health activities while preserving exclusivity and profitability. For instance, they may set up a limited-edition clothing line with a portion of the proceeds going to a good cause, or they could donate a portion of their average profits to a women’s health organization. As such, in light of the analysis presented above, it is recommended that FA reject the one-time order from the national charity.
Reference
Chapter 9: Operating decisions. (2013). John Wiley & Sons. [PowerPoint slides].