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 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 time constraints and financial constraints the best method for collecting this data was to be online, data on the prices of these suits was done through the official websites Top shop, Burton, Marks Spencer, Austin reed store, Armani and Hugo Boss.

 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:

 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:

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

 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:

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:

 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:

 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.

 Indirect costs:

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

 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:

 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 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:

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: