ATHLETE WEAR COMPANY CASE STUDY (75 Marks)  Athlete Wear Co. is an Irish sports clothing manufacturer for elite amateur and professional athletes. It has recently seen a decline in profitability owing to increased competition from low cost mass production manufacturers and has been outbid for contracts as official clothing

ATHLETE WEAR COMPANY CASE STUDY (75 Marks)

 Athlete Wear Co. is an Irish sports clothing manufacturer for elite amateur and professional athletes. It has recently seen a decline in profitability owing to increased competition from low cost mass production manufacturers and has been outbid for contracts as official clothing supplier for three major international and domestic sporting events. As a result, Athlete Wear is faced with having to suspend its operations immediately unless it can find alternative markets to ensure the business can remain operational. The window to implement a new plan is very tight. Luckily, the production and sales directors had already assembled a team to devise a plan, referred to as ‘Plan Stepdown,’ to diversify the business away from its reliance on the elite sports market. While much of the outline of Plan Stepdown is ready, it still requires input from the finance department. Although the team had intended to present Plan Stepdown at a strategy conference planned for later this year, events have now overtaken them and an emergency meeting of Athlete Wear’s senior management team has been called for next week. The principle agenda items are an assessment of the current level of stress on the firm’s liquidity and a discussion of the proposed Plan Stepdown which, it is hoped, can go into production quickly.

 

To assist with these discussions, you are required to prepare a financial report package for the meeting regarding Athlete Wear’s current liquidity condition and the expected financial implications of the Plan Stepdown proposal under consideration.

 

Your report package must include the following:

1. Trading, profit and loss account and balance sheet, 30^th April 2020 (20 Marks)
2. Forecast trading profit and loss for the six months ended 31^st October 2020, in contribution form.

(20 Marks)

3. Cash forecast for the six months ended 31^st October 2020. (20 Marks)
4. Evaluation of Athlete Wear ’s liquidity position and recommendations to improve it. (15 Marks)

 

     Total (75 Marks)

 

 

 

 

You have ascertained the following information to assist with your assessment:

• Athlete Wear is registered for VAT and charges 23% VAT on its sales. VAT returns are submitted on-line following the end of each (calendar) two monthly period and payment is made by the 23^rd of the relevant month.
• Ignore taxation other than VAT.
• A loan of €69,000,000 was taken out with Irish Bank plc on 1^st May 2015 and is repayable in full on 1^st May 2025. The interest rate on the loan is 10% per annum, payable quarterly on 1^st  August, 1^st November, 1^st February and 1^st May each year.
• All Athlete Wear’s sales and purchases are on 30-day credit terms. All other expenses are paid immediately on receipt of invoice.
• Athlete Wear depreciates it’s property, plant & equipment on a straight-line basis as follows:
  • Buildings 40 years
  • Machinery 20 years
  • Delivery vans 5 years
  • Fixtures & fittings 10 years
  • Office furniture & equipment 10 years
• The following appendices are included:
  • Appendix 1: Trial balance extracted from Athlete Wear ’s records @ 30^th April 2020.
  • Appendix 2: Details of Plan Stepdown’s new manufacturing line and financial projections for the six months from 1^st May 2020 to 31^st October 2020
  • Appendix 3: Abridged financial statements for two previous years to 30^th April 2019 and 2018 .

 

 

 

Please note that whilst your report package is to include specified statements and reports, it is necessary to include all relevant data and conclusions into the financial assessment to ensure that the full economic impact is considered.

 

 

 

Appendix 1 – Trial Balance  @ 30^th April 2020

 

Trial Balance as at 30th April 2020
	€000	€000
Share capital		50,000
Retained earnings @ 30th April 2019		206,655
Loan		69,000
Building (cost)	100,000
Building accumulated depreciation @ 30th April 2019		25,000
Machinery (cost)	85,000
Machinery accumulated depreciation @ 30th April 2019		12,750
Delivery vans (cost)	18,500
Delivery vans accumulated depreciation @ 30th April 2019		7,400
Fixtures & fittings (cost)	14,000
Fixtures & fittings accumulated depreciation @ 30th April 2019		4,200
Office furniture & equipment (cost)	13,500
Office furniture & equipment accumulated depreciation @ 30th April 2019		5,400
Inventory @ 30th April 2019	147,500
Trade receivables	87,300
Bank overdraft		15,950
Trade payables		45,700
VAT payable		6,220
Sales revenue		370,000
Purchases	248,750
Wages and salaries	62,500
Light and heat	7,250
Selling expenses	6,500
Advertising	3,000
Client entertainment	2,750
Legal and professional fees	1,500
Maintenance and repairs	4,800
Motor expenses	6,500
Office expenses	3,750
Interest expense	5,175
	818,275	818,275

 

 

• On 30^th April 2020 the following expenses had not been accounted for. Athlete Wear plans to pay the outstanding amounts on 1^st May 2020.
  • Wages – overtime for April 2020 €3,200,000
  • Petrol for delivery vans (inclusive of VAT @ 13.5%) €   150,000
  • Legal fees (inclusive of VAT @ 23%) €1,230,000
• Inventory on hand @ 30^th April 2020 is valued at €171,250,000
• Amounts due from trade receivables at 30^th April 2020 are expected to be received 50% in May and remainder in June
• Amounts due to trade payables at 30^th April 2020 are expected to be paid in full in May.

 

 

Appendix 2 – Financial projections for six months ended 31^st October 2020

 

Plan Stepdown

Athlete Wear  produce high quality, durable, branded sport wear for athletes. This is an elite market reliant on high profile sporting event endorsements and branding. Having reviewed the success of companies such as lululemon athletica inc., Plan Stepdown proposes to diversify into the general leisure wear market with Athlete Wear’s own version of light-weight sport wear for general leisure use. As this product line will not be elite sport wear it will be less expensive to produce but, as it is important not to compromise Athlete Wear’s quality reputation, it will still be more expensive to produce than competitor products.  Direct costs per unit are forecast as…

Cost type	Per unit
Materials:  €43 per meter (inclusive of VAT @ 23%)	2 meters
Labour:      €15 per hour	7 hours

 

Plan Stepdown will aim its product at the quality end of the leisure wear market and the expected selling price of €250 per unit will reflect this.

 

As it also envisages that the product line expanding in the future Plan Stepdown has provisionally signed up two well-known online ‘influencers’ to promote the product and enhance its marketability for the next six months. These influencers will each be paid €25,000 + VAT @ 23%  per month for the promotion campaign.

 

Other cost projections to be considered are:

Fixed costs	May	June	July	August	September	October	Total
Admin/sales salaries	1,750,000	1,750,000	1,750,000	1,750,000	1,750,000	1,750,000	10,500,000
Light & heat	510,750	510,750	510,750	510,750	510,750	510,750	3,064,500
Selling expenses	1,168,500	1,168,500	1,168,500	1,168,500	1,168,500	1,168,500	7,011,000
Advertising	135,300	135,300	135,300	135,300	135,300	135,300	811,800
Maintenance/repairs	492,000	492,000	492,000	492,000	492,000	492,000	2,952,000
Motor expenses	650,375	650,375	650,375	650,375	650,375	650,375	3,902,250
Office expenses	215,250	215,250	215,250	215,250	215,250	215,250	1,291,500
Depreciation (per depreciation policy)
Loan interest (per loan agreement)

 

 

Note: The following cost projections have been stated inclusive of VAT as follows:

VAT @ 23%	VAT @ 13.5%
Selling expenses	Light & heat
Advertising	Petrol
Maintenance & repairs
Motor expenses (note: €1,872,750 relates to petrol costs)
Office expenses

In order for this line to be considered successful, it must produce a profit of €12,000,000 by the end of October 2020. No other product will be produced or sold during this period.

 

The sales volume required to meet the profit target will be achieved as a percentage of annual sales as follows:

Month
May	10%
June	10%
July	10%
August	10%
September	20%
October	40%

 

Expected sales mix per month is expected to be 30% directly to the public via on-line cash sales in Athlete Wear’s existing on-line store  and 70% credit sales on 30 day credit to retail outlets. It is expected that 50% of credit sales receipts will be received in the month following the sale with the remaining 50% received the following month.

 

Inventory on hand @ 30^th April 2020 cannot be used in the new product line. Material for the new production line will be bought in at the start of each month in the required amount to meet that month’s sales. No inventory of material will be held. All material will be purchased on 30 day credit and paid for in the month following purchase.

 

All operating expenses will be paid in the month incurred.

 

Influencers will be paid their endorsement fees monthly.

 

No new investment in machinery or equipment is required for the next 6 months.

 

 

Appendix 3 – Abridged Financial Statements

 

Income statement for year ended 30th April	2019	2018
	€000	€000
Sales revenue	456,870	491,677
Less: Cost of goods sold	(295,900)	(323,551)
Gross profit	160,970	168,126
Less expenses	(177,160)	(113,936)
Profit for the year	43,810	54,190

 

 

Balance sheet as at 30th April	2019	2018
	€000	€000
Non-current assets
Property, plant & equipment	176, 250	135,870
Current assets
Inventories	147,500	152,480
Trade receivables	80,350	70,690
Bank	2,950	29,460
Total current assets	230,800	252,630
Total assets	407,050	388,500
Equity and liabilities
Share capital	50,000	50,000
Retained earnings	206,655	162,845
Total equity	256,655	212,845
Non-current liabilities
Loan	69,000	69,000
Current liabilities
Trade payables	43,205	75,465
VAT	32,960	26,320
Accrued expenses	5,230	4,870
Total current liabilities	81,395	106,655
Total liabilities	150,395	175,655
Total equity and liabilities	407,050	388,500