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Addressing the meeting, Sneha said that in order to overcome the problem, Pepe Denim needed to attract new customers and sell more goods to repeat

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Addressing the meeting, Sneha said that in order to overcome the problem, Pepe Denim needed to attract new customers and sell more goods to repeat customers. She said the company needed to add new product lines; however, in order to keep costs down, the product lines had to be such that they would not require much additional cost. She suggested two new products which would require the same type of material and similar labor, and would serve the female segment of the market. Sneha said the two products which could be added easily were Denim Skirts and Denim Handbags for women as these two items would require the same raw materials. Besides, with a little training the same tailors could undertake the stitching activity. After examining the suggestion, Bajaj thought that the two products would be a good strategic fit for the existing product line. He sought the opinion of the board of directors and they too gave a favorable response. With this, it was decided that the company would add these two products as soon as possible. After one year of the introduction of the two products i.e. on March 31, 2011, Kesar called Nihit the CFO (Chief Finance Officer) of the company, to find out about the company's profitability and asked him to present Pepe Denim's income statement. Nihit brought a summarized income statement which was as follows: Exhibit - II Income Statement of Pepe Denim for the year ending March 31, 2011 Particulars Details Amt (in 000s) Sales 2000000 Less: Cost of goods sold 1263450 Gross Profit 736550 Less: Indirect expenses Office expenses 129150 Selling and distribution expenses 126000 255150 Net Profit before depreciation 481400 Less: Depreciation 16400 Net Profit after depreciation 465000 Less: Tax (40%) 186000 Profit after tax 279000 From the income statement, Bajaj calculated the profit before tax percentage on sales and it worked out to be 23.25 - 4.25 per cent higher than the previous year's profit. This improvement in profit gave him some satisfaction and he was eager to know how the new products were performing and what their cost structures were. He asked Vipin to present the cost sheet of Denim Skirts and Denim Handbags. Vipin was not ready with the cost sheets and so presented the following cost details of all the products: Exhibit - III (Amount in 000s) Denim Particulars Jeans Denim Skirts Handbags Stock of materials as on April 1, 2010 200000 Stock of materials as on March 31, 2011 150000 75000 25000 Material purchased during the year 600000 300000 100000 Sale of material (not suitable) 25000 Work-in-progress as on April 1, 2010 100000 Work-in-progress as on March 31, 2011 35000 10000 5000 Finished Stock as on April 1, 2010 350000

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