Reference no: EM132984317

Aryan has been recently promoted to the Chief Financial Officer role of JBL Inc., following the sudden retirement of his long-time supervisor and mentor, Valerie. Aryan, who has worked at the company since he graduated six years ago, has some ideas on how to improve the company, but is worried about making mistakes. After all, he doesn't come from an accounting and finance background and relied heavily on Valerie's guidance in his previous role as Controller. Aryan wants to get a detailed report from you, a talented group of MBA students, before he makes any major decisions.

• Predictably, JBL Gear's sales are largely seasonal, with most of the year's sales occurring over the spring and summer months. JBL Gear mostly sells locally in the BC area, through ongoing supply contracts with local vendors. It has also managed to secure a deal with an American chain with small shop down the western coast, from Washington state, through Oregon, and down to California. Supplying the chain accounts for about 15% of JBL Gear's sales revenues.

• Last year, JBL Gear generated $2 million in sales in the March 1st to August 31st 6-month period. In the other months, sales totalled $500,000. Both numbers were an approximate 1.5% increase from the year before and a 2% increase from two years ago.

• JBL Gear's biggest expenses are salary and supplies, which are used as inputs for manufacturing inventory. Typically, salaries amount to 26% of revenues while supplies total 22%. After the other expenses were taken into account, last year's net profit totalled $990,000. This was a 5% increase over the previous year and a 5.5% increase from two years ago. Aryan projects a 1% growth in revenues over last year. He is unsure about what the projected profit might be, so he is seeking help with that.

• The first decision Aryan is contemplating involves the company's expansion plans. Management is considering opening a Vancouver-based store which would sell directly to customers. Getting the store to opening point next year would cost an estimated $280,000, which can be drawn on the company's line of credit at 5%. However, Aryan estimates that the store will generate revenues of $150,000 annually for eight years. He is especially excited about the higher margins realized by selling directly- the manufacturing costs would only add up to 27% of revenues! However, there would also be $40,000 in salary expenses and $3,000 a month in rent. Aryan is wondering if JBL Gear should proceed with opening the store, taking into consideration all factors, including those he may not have thought of.

• Aryan is also taking a close look at the manufacturing of a new product, designed picnic towels. JBL Gear had always produced picnic towels in various colours. However, one customer started adding interesting designs to the towels, such as cartoons, JBL elements, and catchy slogans. Towel sales skyrocketed and other customers adopted the idea. Now, JBL Gear is considering adding designs to the towels on its own prior to selling. It typically sells packs of 50 towels for $150. With designs, it would aim to sell 20 towels for $140. There is also the option of continuing to sell mainly basic towels to retailers and adding designed towels to the new outlet for $10 each.

• Aryan estimates that one technician earning $30 per hour can add designs to ten towels an hour. The design materials are purchased in bulk for $300, which are enough for decorating around 200 towels. Aryan isn't sure if designing towels adds anything to manufacturing overhead since the machinery and factory space is readily available. He wonders if it is worthwhile for JBL Gear to start adding designs to some or all of the picnic towels it produces. JBL Gear Case

• Hailey, JBL Gear's CEO, is interested in doing some ratio analysis. She wants to compare contribution margin as a percentage of sales for the past two years with the projections for this year. She also wants to do the same comparison with the margin of safety percentage. Aryan estimates that this year's expense totals will be a half fixed and half variable. He believes that fixed expenses have been relatively constant for the last few years. In addition to the numbers, Aryan would also like some explanations on what they are implying. He has heard of something called "discretionary fixed cost" and the concept doesn't make sense to him, especially since he views fixed costs as expenses which can't be avoided. He wonders if it is a good idea to only have discretionary fixed costs in JBL Gear as opposed to other types of fixed costs.

• Finally, Aryan mentions that he was hired into the CFO role on an interim basis with the possibility of being made permanent based on performance. Although he wants to succeed in this role, he does have the best interest of the company at heart. He has been stressed out recently and is increasingly wondering if he is the right person for the job. He is seeking advice on the optimal long-term path forward for himself and the company.

Problem 1: Prepare a business report for Aryan. Discuss all relevant issues, including pros and cons of each course of action. Outline any questions/inquiries which should be directed to Aryan and why the information is important to certain decisions.