Canadian Managerial Accounting Cases

$12\mathrm{.}3$ Fit Apparel

Fit Apparel $($FA$)$ sells high$-$quality workout clothing across Canada and the United States. FA is a private company owned by two sisters, Trina and Cora Smith. Ten years ago, the sisters decided to turn their lives around and get healthy. This involved a strict eating plan and an even stricter workout regimen. One thing that they both found motivating was feeling good at the gym, including wearing stylish clothes. The sisters decided to begin manufacturing and selling premium$-$priced workout apparel to both men and women. After many bumps along the road, $10$ years later FA operates as a successful and extremely profitable business.

Fit Apparel doesn't have physical stores. You must purchase the clothing from an independent consultant. The independent consultants are experts on the product and are very passionate about what they do$.$ It is the role of the independent consultant to market the product. The most common way that this is done is usually by hosting in$-$home parties. The consultant will visit a customer's home, and showcase the top$-$selling apparel items to a group of friends. There are many different incentives for the consultants, which make their job very lucrative; over $80\%$ of the consultants earn more than $$130,000$ per year. FA has been clear with the independent consultants that the company will never directly compete with them for sales.

The clothing is of premium quality and is priced at a premium amount. The top$-$selling products include hooded sweatshirts and workout tops, pants, and shorts. Other items that broaden the product range include items such as water bottles, body wash, and running shoes.

A typical customer of FA is a woman between the ages of $25$ and $45.$ She loves to be outdoors and loves to exercise. Being healthy is important to her and she is at peace with herself. She has always felt the need to belong in group settings and loves to shop.

All clothing is priced at total cost plus $60\%.$ The pricing is very high and makes the products "exclusive." Not everyone can afford to be part of the FA "club." No item ever goes on sale. If a product doesn't sell, it goes to waste.

The two sisters have attributed their success to finding a way to make people feel good about themselves. If something makes a person feel good, they are often willing to pay more money. The FA manufacturing plant currently has capacity to use about $5$ million machine hours. It is currently using about $3$ million machine hours.

FA has been approached by a well$-$recognized national charity that supports women's health. The charity has asked FA to manufacture $1$ million cycling jerseys for its annual cycling event. The event requires each participant to raise $$2,000$ in order to be eligible to ride their bike from one destination to another. Each participant must also purchase the cycling jersey. The charity has suggested that each participant will pay $$30$ for a jersey. This represents a fraction of the retail selling price of $$75($see Exhibit $1).$ Although FA currently manufactures cycling jerseys, the sisters are not sure if they should accept this offer. In order to manufacture the jerseys, FA would have to purchase a screen print machine that would cost $$200,000$ and incur $$25,000$ of set$-$up costs. Because of the screen printing, these custom jerseys would require an additional $0\mathrm{.}25$ labour hours and $0\mathrm{.}5$ machine hours each.

EXHIBIT $1-$ CYCLING JERSEY COST INFORMATION $($PER JERSEY, BASED ON $4$ MILLION JERSEYS PRODUCED ANNUALLY$)$

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