Company Information

EcoChic Handbags was founded by two entrepreneurs who are passionate about eco-friendly and cruelty-free fashion. The company sources its materials from sustainable and ethically responsible suppliers, and their products have gained a loyal customer base that values both style and environmental consciousness. EcoChic Handbags currently operates a production facility and an online retail store. They are now planning to expand their business by opening physical retail stores in prime locations. Customers are drawn to their tagline Keeping water clean, air pure, and fashion fresh.

Financial Information

The company's financial statements are exhibited in Appendix 1, with some important details about operations. Appendix 2 provides some benchmarks from similar companies operating in the same retail space.

The company has two revenues streams design costs are incurred when Enzo designs handbags and sells the design to other fashion labels to produce- the product revenue is from the sale of handbags made of sustainable materials.

During the year, the company sold 547 handbags and Enzo sold 5 designs to various other manufacturers. The handbags have a fixed sale price but the designs tend to vary in price depending on their level of complexity and difficulty. Due to the seasonal nature of the business, assume that the company sells 1.5 times more during the spring and summer months than in the Fall and Winter.

Enzo is forecasting that the company will sell 200 bags during the winter month of 2024 as the company is quickly growing. He expects handbag demand to increase by 20% per year as well.

EcoChic Handbags has built up an online presence, but Maxwell is considering opening physical retail stores.

Appendix A: Financial Statements Balance Sheet

EcoChic Handbags
Statement of financial position
As at December 31
	2024	2023	2022
ASSETS
Current Assets
Cash	1,834	2,560	1,983
Inventories	371	389	365
Prepaid expenses	275	265	259
Total Current Assets	2,480	3,214	2,607
Property, Plant and Equipment net	40,956	43,512	42,774
Intangible assets	4,983	4,983	4,983
Goodwill	2,200	2,200	2,200
TOTAL ASSETS	50,619	53,909	52,564
LIABILITIES & S/H EQUITY
Current liabilities
Trade payables	1,692	1,642	1,598
Accrued Liabilities	2,160	2,430	2,295
Income taxes payable	400	350	325
Employee bonuses payable	1,250	3,975	1,850
Current portion L/T debt	1,275	1,275	1,275
Current portion redeem Preferred Shares	1,500	1,500	1,500
Total current liabilities	8,277	11,172	8,843
Long-term debt
Term loan bank	15,311	16,586	17,861
Redeemable preferred shares	7,500	9,000	10,500
Total long-term debt	22,811	25,586	28,361
Total liabilities	31,088	36,758	37,204
Shareholders' Equity
Share capital	4,000	4,000	4,000
Retained earnings	-	-	-
Total shareholders' equity	4,000	4,000	4,000
TOTAL LIABILITIES & S/H EQUITY	35,088	40,758	41,204

Appendix A continued: Financial Statements Income Statement

EcoChic Handbags
Income Statement
As at December 31
	2024	2023	2022
REVENUES
Design revenue	41,057	46,511	45,117
Product revenue	23,445	24,224	22,481
Total Revenue	64,502	70,735	67,598
EXPENSES
Design costs	24,142	25,953	23,270
Product costs	5,887	5,261	5,176
Advertising and promotion	718	703	695
Amortization	4,691	4,640	4,628
Employee wages and benefits	11,868	13,075	13,292
Employee bonuses	1,250	3,975	1,850
Rent	3,926	4,020	3,978
Operating costs	7,452	8,659	9,520
General and administrative	1,536	2,078	2,080
Total Expenses	61,470	68,364	64,489
Operating Income	3,032	2,371	3,109
Interest income	22	23	15
Interest expense	(792)	(851)	(910)
Foreign Exchange gain (loss)	(93)	(172)	(55)
Income before taxes	2,169	1,371	2,159
Income taxes (25%)	542	343	540
Net earnings	1,627	1,028	1,619

Appendix 2 Industry Standard Ratios

Type	Ratio	Benchmark
Liquidity	Current Ratio	0.67
Quick Ratio	0.64
Cash flow liquidity ratio	1
Inventory Turnover	17
Days to Sell Concession	21
Accounts payable Turnover	10
Accounts payable Payment Period	32
Solvency	Long term debt to equity	0.47
Debt to Equity	1.2
Debt to assets ratio	0.54
Times interest earned	n/a
Cash Flow to Total Liabilities	1
LTD to EBITDA	n/a
Profitability	Operating Margin	9%
Net Profit margin	6%
Return on sales	4.70%
Return on Equity	4.70%
Return on Assets	10.40%
Design costs to design revenue	52%
Advertising as percentage of revenues	2%
General and admin as percentage of revenues	6%

Questions:

1. Owner is considering opening physical retail stores. Maxwell wants your team to prepare an analysis of whether this is feasible for the company.
2. Maxwell estimates rental costs of $2,000 per month, utilities of $300 per month, a one-time investment in store design of $7,000 and recurring salary expenses of $5,000 per month. He expects this change to increase sales revenue to 8 times its current levels and reduce the seasonality of the sales. Operating online costs $8,000 per year in hosting and requires $250 per month in order fulfillment employee wages. Maxwell wants your calculations on this in addition to any qualitative items that need to be considered in the decision.
3. Prepare a return on investment calculation and determine the payback period for this capital investment.