Reference no: EM13611422

On Jan 2008, XYZ collections, alarge manufacturing and retailer of high-end woman's apparelposted lackluster sales for the past 3 years and margin were now atall time low. The company's target market was affluent,fashionable, college educated and professional women. Butthis was running into demand for stylish, active-wear lines thatwere being sold in department stores. As a result of thisinformation XYZ executive were mulling over the possibility ofexpanding its Vigor line into active wear.

Ongoing advertising for anactive-wear line was estimated at $3 million per year, exclusive oflaunch costs. Upon some analysis, the management think that thesuggested retail price for a vigor hoodie, t-shirt and pants wouldbe $100, $40, and $80 respectively. Wholesale prices from themanufacturing group to the retailers would be 50% of thosefigures

A facility to manufacture the pantscould be rented for $500,000 annually with equipment costing and $2million and plant start up costs estimated at $1.2million. YearlyOverhead, excluding rent, was projected to be $3 million. Hoodiesand T-Shirts could be produced at a plant that could be rented forthe same annual amount as the pants plant. Equipment would be cost$2.5 million, start- up costs would be another $2.5 million, andyearly overhead, excluding rent, would be $3.5million.

Launch costs, which included anational advertising and public relations campaign, were estimatedat $2million. New fixtures for company-owned stores carrying theactive-wear line would run $50,000 per store. All launch, fixtures,plant start-up, and equipment costs would be depreciated over afive-year period.

Managers had also run numbers onvariable costs. Direct labor of sewing, pressing, and cutting isestimated at $16.40 for pants, $20.55 for Hoodies and $7.50 forT-shirts. They projected working capital requirements at 3% ofwholesale prices and sales commission at 4%, carrying costs forinventory to be 1% of wholesale prices. Other expenses that theyestimated were bad debt at .7% of wholesale prices, transportationat .24% and others at .15%. Vigor would be able to leverageXYZ's existing cosporate support functions (e.g., IT, HR etc)to run the new business, but Vigor would have to hire a generalmanager decicated to the new product line. The management salariesand support allocations were estimated at $1million peryear.

Question: What sales are needed to breakeven?Is this attainable? Can we achieve the sales needed to capture anattractive profit margin?