Fashion Designs International, Inc. Preview the document [PDF] case study and complete the following requirements.

 

Instructions

Please note:  All information required for this assignment is provided in the

Unit 3 Student Workbook

[Excel] for this unit.

Read the

Fashion Designs International, Inc.

[PDF] case study and complete the following requirements.

Quantitative Analysis: 

Based on the information presented in Tables 1 and 2, calculate the following:

1. Calculate Total Variable Costs.
2. Calculate Total Fixed Costs
3. Calculate Contribution Margin per Unit
4. Calculate Break-Even, Unit Sales
5. Calculate Target Profit

Qualitative Analysis: 

In a 2-3 page report, based on your quantitative analysis, what do you think FDI should do with its production: continue in North America or move it overseas? Discuss the quantitative, qualitative, and ethical factors, if any, that come into play with this decision.  Support your recommendation with a minimum of 3 academic resources.

Deliverables

• Quantitative Analysis (Excel Required): You are required to use the provided Excel workbook to complete the quantitative analysis for this assignment.
• Qualitative Analysis (Word Required): Prepare a 2-3 page summary addressing the required qualitative analysis, as noted in the Student Workbook.  Your paper is required to be formatted according to APA requirements.  Be sure to incorporate key concepts from this unit’s readings and properly cite your references according to APA requirements.  Do NOT embed the results of your quantitative analysis in your Word document.  You should only reference parts of your quantitative analysis in your written analysis.  Your written responses to the qualitative prompts should not be presented in a question and answer format.

CaseStudy

2

>Data

ashion Designs International, Inc.

1,

1,260

22,450

5,400 5,400

30,996

36,996

42,234

7,380

2,100

ehicle expenses

)

amount (

)

Cost of Goods Sold:

V

(6) x VC per unit

V units sold (6) x VC per unit

3.00% -50%

V units sold (6) x VC per unit

3.00% -50%

V units sold (6) x VC per unit

3.00% -50%

V units sold (6) x VC per unit

3.00% -50%

V units sold (6) x VC per unit

3.00%

Operating Expenses:

Bank charges F

0%

F

0%

F fixed annual cost x 1

0%

Wage expense V

x VC per unit

2.0%

F

0%

V

same % 0%

Insurance F fixed annual cost x 1

1.5%

F fixed monthly cost x 12

1.5% 0%

Legal fees F fixed monthly cost x 12

1.5%

F fixed monthly cost x 12

1.5%

Meals and entertainment F fixed monthly cost x 12

1.5% 0%

Printing and reproduction F fixed monthly cost x 12

1.5% 0%

Professional Fees F fixed monthly cost x 12

1.5% 0%

Marketing and promotion F fixed monthly cost x 12

1.5% 0%

Rent – Office F fixed monthly cost x 12

1.5% 0%

Rent – Warehouse F fixed monthly cost x 12

1.5% 0%

Repairs and maintenance F fixed monthly cost x 12

1.5% 20%

Security expense F fixed monthly cost x 12

1.5% 0%

Office supplies F fixed monthly cost x 12

1.5% 0%

Telephone and internet F fixed monthly cost x 12

1.5% 0%

F fixed monthly cost x 12

1.5% 0%

Travel expenses F

1.5%

Utilities F fixed monthly cost x 12

1.5% 0%

1a

1b

2

3

4

5

6

Table 1
																						F
Comparative Income Statements
year ended December	3
201	4	201	5	201	6
Sales	$1,987,050	$2,124,885	$2,249,830
	Cost of Goods Sold:
Fabric	237,250	250,390	264,260
Cutting	201,500	212,660	224,440
Sewing	260,000	274,400	289,600
Brand labels	3,900	4,116	4,344
Thread etc.	650	686	724
Shipping and freight	29,250	30,870	32,580
Total Cost of Goods Sold	732,550	773,122	815,948
Gross Profit	1,254,500	1,351,763	1,433,882
	Operating Expenses:
	Bank charges		1,260	1,320
Salary expense	350,000	360,000	370,500
	Wage expense	263,250	291,722	323,275
Employee benefits – salaried employees	63,000	64,800	66,690
Employee benefits – hourly employees	31,590	35,007	38,793
	Insurance		22,450	23,124
Information Technology services	8,220	8,340	8,520
	Legal fees	15,000	18,840	20,280
Licenses and permits			5,400
	Meals and entertainment	14,304	15,019	15,925
	Printing and reproduction	1,452	1,740	1,860
	Professional Fees	15,504	16,260	16,920
	Marketing and promotion		30,996	34,104
	Rent – Office		36,996	3	7,380
	Rent – Warehouse	41,004		42,234
	Repairs and maintenance	8,592	10,188
	Security expense		2,100	2,184
	Office supplies	2,136	2,532	2,844
	Telephone and internet	2,472	2,604	2,808
								V	5,760	5,875	6,051
	Travel expenses	21,000	21,210	21,846
	Utilities	1,956	2,034	2,156
Total operating expenses	944,442	997,907	1,051,295
Profit before taxes	310,058	353,856	382,587
Income taxes	93,017	106,157	114,776
Profit after taxes	$217,041	$247,699	$267,811
Table 2
Fashion Designs International, Inc.
Assumptions for Income and Expense Projections
Expense Item	F/V (	1a	Formula		2016	1b	Projected annual growth	Effect of overseas move
Fabric (2)							units sold	$7.30000						3.0																	0%					-50%
Cutting (2)	$6.20000
Sewing (3)	$8.00000
Brand labels (4)	$0.12000
Thread etc. (1)	$0.02000
Shipping and freight (5)	$0.90000	300%
															fixed monthly cost x 12	$1,320																		1.5%
Sal exp – owner			fixed annual cost x 1	$150,000	0.0%
Sal exp – employees	$220,500		2.0%
	units produced	$8.93025	–	20%
Emp benis – sal	salary expense x percentage	$66,690		same %
Emp benis – hrly	wage expense x percentage	$1.07163
$23,124	250%
IT services	$8,520
$20,280	200%
Lic & Permits	$5,400	75%
$15,925
$1,860
$16,920
$30,996
$37,380
$42,234
$10,188
$2,184
$2,844
$2,808
Vehicle expenses	$6,051
fixed quarterly cost x 4	$21,846	400%
$2,156
F = fixed cost; V = variable cost;
for variable (V): amount per unit; for fixed (F): annual amount
cost paid on per yard basis ;
cost paid on per piece basis
cost paid on per label basis ;
cost paid on weight and volume basis
units sold and units produced both projected to grow at annual rate of 6%

Student Template

Fashion Designs International, Inc.

2016

units sold

units produced 36,200

(b)

Fixed costs

÷ CM/U

Global Assumptions:
	36,200
avg sales price	$62.15
income tax rate	30%
benefits – salary	18.0%
benefits – wages	12.0%
Desired Cash Payout
(a) – Calculate Total Variable Costs
Total variable costs
(b) – Calculate Total Fixed Costs
Total fixed costs
(c) – Calculate Contribution Margin per Unit
Sales price per unit
Variable costs per unit (a)
Contrib margin per unit
(d) – Calculate Break-Even, Unit Sales
	Fixed costs
	÷ CM/U
Unit sales, BEP
(e) – Calculate Target Profit
Desired cash payout to owner (from scenario)
Subtract owner salary
Target profit after taxes
÷ 100% less income tax rate
Target profit before taxes
FC + target profit
Unit sales, target profit

Adapted from IMA

IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 4, ART. 2, DECEMBER 2018

ISSN 1940-204X

Fashion Designs International, Inc.
George Gonzalez, PhD, Assistant Professor Accounting
University of Lethbridge–Calgary Campus
Calgary, Alberta, Canada

INTRODUCTION
“Balancing quantitative and qualitative factors can be quite a challenge,” Charles Riley thought to himself. Riley
is the CFO of Fashion Designs International, Inc. (FDI), a small women’s apparel business. The CEO and sole
shareholder of FDI, Alina Rossi, had asked Riley for suggestions about how to increase the company’s profits
to the level that matched her financial goals. Riley knew, however, that there were qualitative factors of
importance to Rossi that posed challenges.

FDI, based in Greensboro, North Carolina, manufactures and distributes women’s apparel to retailers
worldwide under the brand name RossiDesigns. Headed by Rossi, an Italian-educated, award-winning fashion
designer with a high work ethic and a perfectionist streak, the company’s products are considered of excellent
quality by consumers and retailers. The designs, fabric, and processes used in production all contribute to this
high level of quality. Since its inception in 2001, the company has grown steadily to annual sales of US$2.25
million in 2016 (see Table 1).

ALINA ROSSI, FASHION DESIGNER

Alina Rossi studied fashion design in Italy and, upon completing her studies, moved back to the United States
where her family had emigrated when she was 10 years old. Rossi was a highly creative designer who almost
certainly could have done well by selling her designs to large international fashion companies but chose
instead to start her own company.
Rossi started her fashion business in 2001 by selling women’s apparel to small U.S.-based boutique shops.
Her designs—particularly popular with women in their 20s, 30s, and 40s—sold quickly, and her business grew
accordingly. After several years, her market expanded to include Canada, Mexico, and a few countries in
Europe.
Rossi tends to be a perfectionist both with her designs and in her insistence on high production quality. This
manifests itself in her close supervision of production processes, to a point of near-obsession with ensuring the
high apparel standards that she demands.

APPAREL PRODUCTION

The production of FDI’s products is composed of three major phases: (1) manufacturing the fabric to be used
for apparel pieces, (2) cutting the fabric according to the particular apparel piece’s design, and (3) sewing the
cut fabric into apparel wear. FDI’s women’s outfits are made from high-quality fabric, which Rossi specifies to
the fabric manufacturer, a company based in Toronto, Ontario, Canada. Large rolls of fabric manufactured for
FDI are shipped to FDI’s warehouse in Greensboro, where they are stored until ready to be used in production
runs. At such time, fabric is sent to the cutting shop where the fabric is cut into large pieces of specific size and
shape, as specified by Rossi’s design. Finished cut pieces are then delivered to the sewing shop. In the sewing
process, cut pieces are sewn as prescribed by Rossi into final products, which is then transported to FDI’s
warehouse until ready for shipment to retailers (for instance, FDI’s main customers). The cutting and sewing
shops, independent from each other, are both located within a 50-mile radius of FDI’s main offices in
Greensboro.

A separate company, RossiDesigns LLC, owns the RossiDesigns brand name and trademarks. Rossi assigns

all of her designs to RossiDesigns LLC. As apparel pieces are distributed to retailers, FDI pays a royalty to

RossiDesigns LLC for the right to use the designs and the RossiDesigns brand name.1 The RossiDesigns label

is sewn into each piece that FDI produces.

FDI PROFITABILITY

FDI’s profitability is attributable to a lean company structure and Rossi’s talents and work ethic. The company,
however, has not achieved the level of profitability that Rossi desires. While her goal is an annual net cash
payout from the company of US$600,000, currently the net cash paid or available to her (for instance,
combined salary and net profit) is only about two-thirds that amount.2

RILEY’S RESEARCH AND PREPARATION

As mentioned previously, all of FDI’s production activities are in North America: The fabric is produced in
Canada, and the cutting and sewing are done in the United States. Riley believes that the quickest and surest
way for FDI to increase its profitability is by moving manufacturing activities overseas to a low-cost country
where labor and other production costs would be significantly reduced.3 Based on his prior research, Riley has
estimated how the company’s costs would change if all manufacturing was moved overseas (see Table 2). He
has prepared a schedule of revenue and expense growth rates that allow him to project future net profits under
either scenario—for instance, keeping manufacturing in North America or moving it overseas (see Table 2,
“Projected Annual Growth” column). Riley determined the cost behavior of each item of expense based on cost
drivers and used this information to arrive at formulas for projecting each expense item (see Table 2, “Formula”
column).

Riley believes that it is in the company’s best interest to move production overseas and that this course of
action is the best way to reach Rossi’s goals for the company. He recognizes, however, that a big challenge in
convincing Rossi of this is her strong desire for close supervision of all production processes. Riley knows that
Rossi is a perfectionist, and he believes that other related aspects of Rossi’s personality represent potential
hurdles to an overseas move. Fashion design is, at its essence, an artistic skill. As with many artists, Rossi
probably views her company’s final product as an extension of herself. Riley imagines that Rossi’s pride and
ego are significant factors in her strong need for oversight and her obsession with production quality.
Riley knows that he will have to keep Rossi’s personality factors in mind if he is to have a good chance of

convincing her to move the company’s production overseas. When he meets with Rossi, Riley’s challenges

include helping her focus on her financial goal, convincing her that achieving those goals will require tradeoffs

in production supervision, and convincing her that the tradeoffs will be well worth it.

Unit 3_Fashion Designs International, Inc.

Adapted from IMA

IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 4, ART. 2, DECEMBER 2018

ISSN 1940-204X

Fashion Designs International, Inc.
George Gonzalez, PhD, Assistant Professor Accounting
University of Lethbridge–Calgary Campus
Calgary, Alberta, Canada

INTRODUCTION
“Balancing quantitative and qualitative factors can be quite a challenge,” Charles Riley thought to himself. Riley
is the CFO of Fashion Designs International, Inc. (FDI), a small women’s apparel business. The CEO and sole
shareholder of FDI, Alina Rossi, had asked Riley for suggestions about how to increase the company’s profits
to the level that matched her financial goals. Riley knew, however, that there were qualitative factors of
importance to Rossi that posed challenges.

FDI, based in Greensboro, North Carolina, manufactures and distributes women’s apparel to retailers
worldwide under the brand name RossiDesigns. Headed by Rossi, an Italian-educated, award-winning fashion
designer with a high work ethic and a perfectionist streak, the company’s products are considered of excellent
quality by consumers and retailers. The designs, fabric, and processes used in production all contribute to this
high level of quality. Since its inception in 2001, the company has grown steadily to annual sales of US$2.25
million in 2016 (see Table 1).

ALINA ROSSI, FASHION DESIGNER

Alina Rossi studied fashion design in Italy and, upon completing her studies, moved back to the United States
where her family had emigrated when she was 10 years old. Rossi was a highly creative designer who almost
certainly could have done well by selling her designs to large international fashion companies but chose
instead to start her own company.
Rossi started her fashion business in 2001 by selling women’s apparel to small U.S.-based boutique shops.
Her designs—particularly popular with women in their 20s, 30s, and 40s—sold quickly, and her business grew
accordingly. After several years, her market expanded to include Canada, Mexico, and a few countries in
Europe.
Rossi tends to be a perfectionist both with her designs and in her insistence on high production quality. This
manifests itself in her close supervision of production processes, to a point of near-obsession with ensuring the
high apparel standards that she demands.

APPAREL PRODUCTION

The production of FDI’s products is composed of three major phases: (1) manufacturing the fabric to be used
for apparel pieces, (2) cutting the fabric according to the particular apparel piece’s design, and (3) sewing the
cut fabric into apparel wear. FDI’s women’s outfits are made from high-quality fabric, which Rossi specifies to
the fabric manufacturer, a company based in Toronto, Ontario, Canada. Large rolls of fabric manufactured for
FDI are shipped to FDI’s warehouse in Greensboro, where they are stored until ready to be used in production
runs. At such time, fabric is sent to the cutting shop where the fabric is cut into large pieces of specific size and
shape, as specified by Rossi’s design. Finished cut pieces are then delivered to the sewing shop. In the sewing
process, cut pieces are sewn as prescribed by Rossi into final products, which is then transported to FDI’s
warehouse until ready for shipment to retailers (for instance, FDI’s main customers). The cutting and sewing
shops, independent from each other, are both located within a 50-mile radius of FDI’s main offices in
Greensboro.

A separate company, RossiDesigns LLC, owns the RossiDesigns brand name and trademarks. Rossi assigns

all of her designs to RossiDesigns LLC. As apparel pieces are distributed to retailers, FDI pays a royalty to

RossiDesigns LLC for the right to use the designs and the RossiDesigns brand name.1 The RossiDesigns label

is sewn into each piece that FDI produces.

FDI PROFITABILITY

FDI’s profitability is attributable to a lean company structure and Rossi’s talents and work ethic. The company,
however, has not achieved the level of profitability that Rossi desires. While her goal is an annual net cash
payout from the company of US$600,000, currently the net cash paid or available to her (for instance,
combined salary and net profit) is only about two-thirds that amount.2

RILEY’S RESEARCH AND PREPARATION

As mentioned previously, all of FDI’s production activities are in North America: The fabric is produced in
Canada, and the cutting and sewing are done in the United States. Riley believes that the quickest and surest
way for FDI to increase its profitability is by moving manufacturing activities overseas to a low-cost country
where labor and other production costs would be significantly reduced.3 Based on his prior research, Riley has
estimated how the company’s costs would change if all manufacturing was moved overseas (see Table 2). He
has prepared a schedule of revenue and expense growth rates that allow him to project future net profits under
either scenario—for instance, keeping manufacturing in North America or moving it overseas (see Table 2,
“Projected Annual Growth” column). Riley determined the cost behavior of each item of expense based on cost
drivers and used this information to arrive at formulas for projecting each expense item (see Table 2, “Formula”
column).

Riley believes that it is in the company’s best interest to move production overseas and that this course of
action is the best way to reach Rossi’s goals for the company. He recognizes, however, that a big challenge in
convincing Rossi of this is her strong desire for close supervision of all production processes. Riley knows that
Rossi is a perfectionist, and he believes that other related aspects of Rossi’s personality represent potential
hurdles to an overseas move. Fashion design is, at its essence, an artistic skill. As with many artists, Rossi
probably views her company’s final product as an extension of herself. Riley imagines that Rossi’s pride and
ego are significant factors in her strong need for oversight and her obsession with production quality.
Riley knows that he will have to keep Rossi’s personality factors in mind if he is to have a good chance of

convincing her to move the company’s production overseas. When he meets with Rossi, Riley’s challenges

include helping her focus on her financial goal, convincing her that achieving those goals will require tradeoffs

in production supervision, and convincing her that the tradeoffs will be well worth it.