Pepe Jeans Case Study

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Pepe Jeans Case Study Question 1 Flexible system would lead to an increase in the sales of about 10%. Current sales - £ 200M 10% of £ 200M would be £ 20M Profit before taxes(PBT) at the rate of 32 % would mean an increase in the PBT of £ 6 400 000 ( 32% x £ 20 000 000) First alternative Decrease of lead time would lead to an increase in costs by 30%. Currently the yearly cost of sales is 40% of sales of £ 200 000 000 that is £ 80<( 40%x £ 200M) If the cost goes up by 30% it would mean 30% of £ 80M that is £ 24M In return for this increase in cost the company could make an approximate increase in the PBT of £ 6 400 000 that would still mean (24 M – 6.4M) = £ 17.6M additional burden on the company. The advantage in this alternative is that the company does not have to make any initial investment but has to incur this additional burden every year. Since no investment is made , no payback period is calculated. Second Alternative Initial fixed cost for equipment £ 1 M Renovations £ 300 000 Total £ 1. 3M Operations costs £ 500 000 Lead time 6 weeks 40%x £ 200M= £ 80M yearly cost of sales at 40% 6/52 X £ 80M = £ 9 230 000 Inventory carrying cost is 30% of £ 9 230 000 that is £ 2 769 000(30%x £ 9 230 000) Recurring cost= inventory carrying cost+ operations costs= £ 2 769 000 + £ 500 000= 3 269 000 Second Alternative £ 6 400 000 – £ 3 270 000= £ 3 130 000 we get an increase in the yearly profit before taxes Now, the fixed investment made by the company is £ 1 300 000 (calculated above) so the payback period is (1.3/3.13) x 52 = 21.6 weeks . This is the preferred alternative and should be recommended to Pepe. Question 2 Other alternatives The other alternative that Pepe could consider could be to continue with the current arrangement. It is excellent from the financial point of view but it is vulnerable

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