Reference no: EM133003103

Beach Gear Case Reza has been recently promoted to the Chief Financial Officer role of Beach Gear Inc., following the sudden retirement of his long-time supervisor and mentor, Valerie. Reza, 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. Reza wants to get a detailed report from you, a talented group of MBA students, before he makes any major decisions. Predictably, Beach Gear's sales are largely seasonal, with most of the year's sales occurring over the spring and summer months. Beach 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 Beach Gear's sales revenues. Last year, Beach 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. Beach 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. Reza 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
• Reza 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, Reza 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. Reza is wondering if Beach Gear should proceed with opening the store, taking into consideration all factors, including those he may not have thought of.
• Reza is also taking a close look at the manufacturing of a new product, designed picnic towels. Beach Gear had always produced picnic towels in various colours. However, one customer started adding interesting designs to the towels, such as cartoons, beach elements, and catchy slogans. Towel sales skyrocketed and other customers adopted the idea. Now, Beach 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. Reza 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. Reza 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 Beach Gear to start adding designs to some or all of the picnic towels it produces. Beach Gear Case Hailey, Beach 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. Reza 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, Reza 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 that can't be avoided.
• He wonders if it is a good idea to only have discretionary fixed costs in Beach Gear as opposed to other types of fixed costs. Finally, Reza 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 Reza. Discuss all relevant issues, including pros and cons of each course of action. Outline any questions/inquiries which should be directed to Reza and why the information is important to certain decisions.