COST INFORMATION FOR THE BIG TEN SWEATERS China supplier cost
Material $ 31.00
Labor 10.50
Overhead 1.25
Transportation within China 1.00
Supplier profit 8.90
Agent's fee 2.68
Freight (ocean carrier) 1.50
Duty, insurance, etc. 3.00
Total supplier cost $ 59.83
Domestic subcontractor cost
Monogram material $ 6.50
Labor 8.00
Total subcontractor cost $ 14.50
Total (per sweater) $ 74.33
Our monogramming subcontractor gets $13 for each sweater. They also charge a 3% holding cost based on the $73.88 per sweater cost. Shipping cost is paid by the customer when the order is placed.
In addition to the cost data, you also have some demand information, as shown below. The exact sales numbers for last year are given. The exhibit indicates the retail ($125/sweater) or "full price" sales for the sweaters. Sweaters that we had at the end of the season were sold through eBay for $65 each and were not mongrammed. Keep in mind that the retail sales numbers do not accurately reflect actual demand since they stocked out of the OSU sweaters toward the end of the season.
Forecast Data for the Big Ten Sweaters
School Name AVG Game Attendance EBAY Sales Last Yr Last Yrs Actual Sales This Yrs Average Forecast
OSU 105,261 102 2,398 2600
Michigan 108,933 177 1,323 1867
Pitt 50,457 31 969 1100
Michigan State 74,741 1717
Indiana 41,833 617
Penn State 107,008
Wisconsin 80,109
Iowa 70,214
Illinois 59,545
Minnesota 50,805
Northwestern 24,190
Nebraska 85,071
Rutgers 31,478
Maryland 75,327
Total 310 4690 7901
As for advertising the sweaters for next season, Rhonda is committed to using the same approach used last year. The firm placed ads in the football program sold at each game. These worked very well for reaching those attending the games, but she realized there may be ways to advertise that may open sales to more alumni. She has hired a market research firm to help identify other advertising outlets but has decided to wait at least another year to try something different.
Forecasting demand is a major problem for the company. You have asked Rhonda and Steve to predict what they think sales might be next year. You have also asked the market research firm to apply their forecasting tools. Data on these forecasts are given.
Based on advice from the market research firm, you have decided to use the average demand forecast to determine your orders.
You will allocate your order to the individual schools based on their expected percentage of total demand. You discussed your analysis with Rhonda and Steve and they are OK with your analysis. They would like to see what the order quantities would be if each school was considered individually. You were also able to work with your suppliers and worked towards increasing a positive relationship, they have lowered your order minimum to 500 sweaters. They have also reduced their lead time to 8 weeks.
Set up a spreadsheet with all the data from above and you are ready to do some calculations.
Questions
You are curious as to how much Rhonda and Steve made in their business last year. You do not have all the data, but you know that most of their expenses relate to buying the sweaters and having them monogrammed. You know they paid themselves $45,000 each and you know the rent, utilities, insurance, and a benefit package for the business was about $27,000. About how much do you think they made "before taxes" last year? If they must make their payment to the venture capital firm, and then pay 47% in taxes, what was their increase in cash last year?
How many sweaters should you order this year? Break down your order by individual school and size. Document your calculations in your spreadsheet.
What is the Economic Order Quantity (sweaters/order) and how many orders should be placed for the upcoming season?
What do you think the company could make this year? They are paying you $45,000 and you expect your benefit package addition would be about $1,000 per year. The two owners are going to pay themselves an addition $5,000 in their salaries. Assume that they order based on the average forecast. (Figure out total costs, revenue and profit) Don’t forget about the investors, taxes, reorder cost, etc.
How should the business be developed in the future? Be specific and consider changes related to your supplier, the monogramming subcontractor, target customers, and products.