Suit Production Costs And Projected Profits

Suit Production Costs And Projected Profits.

Introduction:

The aim of this paper is to identify, collect, measure and communicate information regarding the suit production costs and projected profits. It focuses on the cost of starting up a cloth shop that will specialise in the sales of men suits. The study includes a selected sample regarding the consumers willing to pay for a suit in the London market. And also the already existing sales companies that have different prices depending on their targeted market.

The analysis considers expected capital costs and also the expected operation costs. another consideration is the expected profit from the business undertaking. The store must there take advantage of the consumers who prefer luxurious good or even take advantage of a decline in the price of its goods in order to increase demand for its products in order to increase sales and therefore increase profits.

Twenty consumers were interviewed in order to find out what level of price they were willing to pay for a suit, the respondents were men and each respondent was interviewed for the purpose of collecting data, after randomly selecting a sample of 20 individuals who were to volunteer for the study it was found out that the mean price for the suits that the consumers were willing to pay was lower than the prevailing market prices.

Suit sales and production:

Suit sales involves the purchase of these product at wholesale prices and then reselling them at a profit, the level of sales will depend on the prices attached to the product, however this will

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Suit Production Costs And Projected Profits.

depend on the consumers preferences, some consumers may prefer high priced good because they have the assumption that the high price is a sign of quality. We will assume that we produce for the medium class individuals who are the majority in the market, using this assumption we will then assume that the store will only sell men suits whose study is accompanied in this paper, through the consideration of all the costs involved in sales we will be in a position to determine expected sales levels and also profits.

Methods:

This study involves two methods of collecting data. The first form of data collected was to collect the consumer’s willingness to pay which involved a random sample of twenty who were involved in a face to face interview. The interview involved the collection of data aimed at determining the consumers willingness to pay, also it contained finding out how frequently consumers purchase suits. All the respondents were to be men due to our first assumption and this sample was collected randomly.

The second study was to determine the price level of existing companies in the market, due to

The choice of stores was in such a way that the study considered the various what segment the stores targeted depending on the income group, low pricing stores include top shop and Burton, medium priced stores include Marks Spencer and Austin reed store and finally the high pricing stores include Armani and Hugo Boss.

Results:

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Suit Production Costs And Projected Profits.

From the sample of twenty data was collected and the willingness to pay of these consumers was determined, there were variations in the data collected depending on the consumers preferences and economic class, the data collected is summarised in the table below:

F

X

FX

frequency

class mid  point

price range

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Suit Production Costs And Projected Profits.

class

0 to 100

2

50

100

101 to 200

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Suit Production Costs And Projected Profits.

14

150

2100

201 to 300

3

250

750

300 to 401

1

350

350

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Suit Production Costs And Projected Profits.

total

20

3300

mean

165

From the twenty respondents only 2 people agreed that they would pay 0 to 100 pounds for a

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Suit Production Costs And Projected Profits.

suit, 14 agreed that they were willing to pay 101 to 201 pounds for the same suit and 3 respondents stated that they would pay 201 to 300 pounds and finally only one respondent agreed that he was willing to pay 0ver 301 pound for a suit. The data was grouped data and after analysing the data the mean price level that the consumers were willing to pay amounted to 165 pounds.

This data can be summarised in a chart as follows:

From the collection of this data it was also clear that consumers were not interested in very cheap products because this would mean to them that this was low quality product, however only a few of the individuals agreed that they would pay a high price for the suit.

The other study involved visiting the various stores websites and determining their average price for a suit, as earlier determined the price conformed to their targeted market depending on their pricing strategy. The information on the prices is represented in the table below:

STORE

PRICE LEVEL  IN POUNDS

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Suit Production Costs And Projected Profits.

TOP SHOP

175

BURTON

179

MARC  SPENCER

199

AUSTINE

199

ARMANI

350

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Suit Production Costs And Projected Profits.

HUGO BOSS

350

From the table it is evident that some stores are high pricing while others are low pricing stores, from this therefore it is evident that there existed three consumer economic classes which include low income earners, medium income earners and high income earners. From the previous study on the willingness to pay it was evident that the middle class consumers were the majority in the market due to the high frequency in choice of price range of 100 to 200. For this reason therefore a store that under prices its consumers could generate high sales and therefore incur high profits in the process.

The above data on the prices charged by the stores can be represented in chart as follows:

Other type of information collected by the interview was to determine how frequently people bought suits in these stores, it was evident that most of the respondents frequently bought suits per year, for this reason therefore the suit market was a free market structure which had free entry and exit by a firm and also many buyers and sellers where the buyers were aiming at maximising their utility and sellers wanted to maximise on profits.

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Suit Production Costs And Projected Profits.

Discussion:

In the suit market there are various costs associated with the successful sales and profit realisation by a store, these costs include direct and indirect costs, and these costs are discussed below:

1. Direct costs:

Direct costs include those costs that can be traced to a particular product, these costs include direct material costs and the direct labour costs, in the store we will assume that the direct material cost include the whole sale purchase of suits, in this case it was evident that the whole sale price of suits in the market was approximately 100 pounds.

Direct labour includes the labourers who are to be employed in the store which include sales men and women and also the cashier and the cleaners.

2. Indirect costs:

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Suit Production Costs And Projected Profits.

Indirect costs are those costs that cannot be traced directly to a certain product, these costs include rent, depreciation costs, lighting, insurance costs and other overheads, and these are costs that are incurred in the process of production and sales of the product.

Given the above data on what to consider we use the variable cost method of caosting, this method of costing is also refered to as directr costing or marginal costingand the fixed production costs in this method are treated as periodic costs and not as production costs, therefore the cost of inventory will only include variable production costs, we will assume the following cost are incurred for each unit produced:

– Variable costs:

These costs include the material costs which in this case will be the cost of one suit in the whole sale market, our estimated value is 100 pounds, the other variable cost is labour cost and we assume that per unit the labour cost is 25 dollars, this includes sales commissions to sales persons and other labour costs, we also assume variable overhead costs amounting to 15 pounds, this costs include transport costs, distribution costs and other office expenses that are variable due to sales per unit, the estimated variable overhead cost is 15 pounds. Therefore the total variable cost is 140 pounds.

– Fixed costs:

Due to such expenses as rent and insurance we assume that the fixed costs are equal to 20,000, this cost will include employee salary, depreciation and also administration costs, these costs will not change even if the production level is zero

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Suit Production Costs And Projected Profits.

We also assume that the selling price of the goods is 165 pounds, this is adopted from the study which signify the average willingness to pay to the consumers, for this reason therefore we will have the sales price as 165 pounds which is lower than the market sales price. This price is desired due to the fact that when the price is lowered then the higher is the demand for the product. This will place the store in a competitive position experiencing high demand for its products.

The following table summarises the costs and selling prices of the product:

variable costs per unit

direct material costs(whole sale price  per unit)

100

direct labour cost

25

variable overhead costs

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Suit Production Costs And Projected Profits.

15

total

140

fixed costs

fixed overhead costs

20,000

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Suit Production Costs And Projected Profits.

selling price

average willingness to pay

165

The break even point:

The break even point can be determined graphically, mathematically or through the contribution margin approach, in this case we will use the mathematical method of determini9ng the break even point, this will be as follows:

The break even point (BEP) is the point where total costs (TC) equal total revenue (TR)

TC=TR

TC = a + bX where a is the fixed costs and B is the unit variable cost and X is the number of

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Suit Production Costs And Projected Profits.

products produced.

TR = PX the total revenue is equal to the price of sales multiplied by the number of units sold X

We substitute the figures in the formulas

TC = 20,000 + 140 X

TR = 165X

TC = TR for the break even point

165X = 20,000 + 140X

25X = 20,000

X = 800 units

Therefore the breakeven point for the company is the sale of 800 units per month or specified period.

This level can be graphically represented as follows:

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Suit Production Costs And Projected Profits.

At the break even point the company is making zero points and at this point the total revenue is equal to the total costs as shown in the graph above.

Cash flow and profit forecast:

From the above discussion having known the variable and fixed cost it is possible to predict what amount of profit will be realised if a certain level of sales is achieved, the following table demonstrates the profit level at each sales level:

TR

TC

profits

0

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Suit Production Costs And Projected Profits.

0

20000

-20000

100

16500

34000

-17500

200

33000

48000

-15000

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Suit Production Costs And Projected Profits.

300

49500

62000

-12500

400

66000

76000

-10000

500

82500

90000

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Suit Production Costs And Projected Profits.

-7500

600

99000

104000

-5000

700

115500

118000

-2500

800

132000

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132000

0

900

148500

146000

2500

1000

165000

160000

5000

1100

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Suit Production Costs And Projected Profits.

181500

174000

7500

1200

198000

188000

10000

1300

214500

202000

12500

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Suit Production Costs And Projected Profits.

1400

231000

216000

15000

1500

247500

230000

17500

1600

264000

244000

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Suit Production Costs And Projected Profits.

20000

1700

280500

258000

22500

1800

297000

272000

25000

1900

313500

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Suit Production Costs And Projected Profits.

286000

27500

2000

330000

300000

30000

As the sale level increases then the profit level increases, when the sales level is equal to 800 then the firm is breaking even with zero profits, depending on the level of sales then the profit level can be determined, if we project that the sales per month will be 1200 units of the product then the profit level will be 10,000 pounds per month and if we project that the sales level will be 2000 units per month then the profit level will be 30,000 and a total revenue of 330,000. For this reason therefore the firm will experience a increase in the level of profits as the sales level increases.

There are other important costs not mentioned in this analysis such as advertising costs, these costs are important in determining the sales level, adverts will inform consumers and also

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Suit Production Costs And Projected Profits.

persuade them to purchase goods from the store and for this reason they must be included in this analysis. Capital costs are also important in starting up this venture and this will be determined by the level of inventory the company wants to start with, licence fees, taxes and depreciation costs are also expected to be incurred in the process of the venture.

Conclusion:

The suit market in the UK is a free market, from the above discussion in order to start a business venture it is important to understand the consumer’s willingness to pay and the already existing firms and their prices and also their level of sales. this will help us determine the demand curve for the goods in the market. This will also help in the determination of the changes in price and the elasticity of demand in the changes in prices. Under pricing competitors is a major advantage a firm can strategise.

From the above discussion it is evident that the average consumer is willing to pay 165 pounds for a suit, the average price of suits in the market is 242 pounds, from the study there are three types of market segments which include the high income earners , the medium income earners and the low income earners, however the medium income earners are th majority and for this reason the company should concentrate on the majority of consumers and this can be achieved by offering lower prices to increase demand for its consumers.

The other most important expense that the company should incur is the advertisement expenses, adverts expenses in most companies cost more than the production costs, for this reason therefore there is need to consider this expense in order for the business to realise more profits and sales levels.

However there is need for further research regarding this study, this should involve a larger or different sample, this study however give a clear indication of the expected price and demand for the product, further study should be undertaken to get the precise prices and the assumed costs and expenses that are incurred in the business undertaking.

References:

Anthony Atkinson and Mark Young (2007) Management Accounting, Prentice Hall publishers, L

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ondon

Armani official website (2008) suit prices, retrieved on 4th april, available at http://www.emporio armani.com/home.asp?gender=U&areaid=7&memory=1&tskay=3FD17CD7

Bluman A. (2000) Elementary Statistics: A Step by Step Approach, McGraw Hill press, New York

Austine Reed official website (2008) suit prices, retrieved on 4th april, available at http://www.a ustinreed.co.uk/icat/onepriceformalsuits

Burton official website (2008) suit prices, retrieved on 4th april, available at http://www.burton.c o.uk/webapp/wcs/stores/servlet/CategoryDisplay?catalogId=20553&storeId=12551& categoryId=94495&parent_category_rn=63454&langId=-1&top=Y

Marks Spencer official website (2008) suit prices, retrieved on 4th april, available at http://www. marksandspencer.com/gp/search/202-4968096-4086260?ie=UTF8&mnSBrand=core&am p;rh=n%3A43483030%2Cp%5F94%3ASingle%20Breasted

Hugo Boss official website (2008) suit prices, retrieved on 4th april, available at http://www.hug oboss.de/redirect.html?goto=stores_en_dsl

Topshop official website(2008) suit prices, retrieved on 4th april, available at http://www.topsho p.com/webapp/wcs/stores/servlet/CatalogSearchResultCmd?langId=-1&storeId=12556&a mp;catalogId=19551&beginIndex=0&pageSize=12&searchTermScope=3& searchTermOperator=LIKE&searchType=ALL&sort_field=Relevance&searchTe rm=suits

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Appendixes:

Research interview questionnaire:

Do you buy suits?

– Yes

– No

Where do you buy your suits?

How much are you willing to pay for the suits?

Price in pounds

– 0 to 100

– 101 to 200

– 201 to 300

– 300 to 401

Do you view the price as a sign of quality?

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