Dada, Dada, Dada

EL SEGUNDO, CA-Dwayne Lewis and Michael Cherry had a dream-a dream to own and run a company. With one lone product (a five-panel polo hat) and $1,000 in pooled paychecks, they launched Damani Dada (DamaniDada.com). The two dreamed that Damani Dada would bring an ultra-hip style to the urban fashion scene. A mere seven years after its launch, Dada projects annual sales of more than $50 million.

The early days, however, were far from easy as Lewis and Cherry struggled alone against long odds. "It was very tricky to try and learn the business without a mentor, recalls Lewis. We always struggled with the task of maintaining a strong financial backing, and we had to learn a lot by making mistakes." Among those struggles was implementing and learning a merchandising system-one that could capture and communicate the costs and sales information so desperately needed by the young entrepreneurs.

A crucial part of their success was tracking merchandising activities. This was necessary for setting prices and making policies for everything from discounts and allowances to returns on both sales and purchases. Also, use of a perpetual inventory system enabled them to stock the right type and amount of merchandise and to avoid the costs of out-of-stock and excess inventory. This chapter describes how the accounting system captures merchandising information for these and other business decisions. It also introduces analysis tools for assessing the financial condition and performance of merchandisers.

Damani Dada successfully weathered the storm and now offers full line of both men's and women's apparel and footwear. NBA sta Chris Webber's chrome Dada shoes were the talk of the 2003 AII-Star Game. But it's still a battle. "Business is war," says Lewis. "You have to be mentally strong, willing to sacrifice, and willing to accept delayed gratification."

Dwayne Lewis and Michael Cherry have earned well beyond the $1,000 they used to launch Damani Dada (see chapters opening feature). Good entrepreneurs continually rethink and refine business strategies. Assume that Damani Dadas most recent income statement follows:

DAMANI DADA

Income Statement ($ thousands)

For Year Ended April 30, 2005

Net sales..$50,000

Cost of sales..35,000

Expenses.4,000

_______

Net income$11,000

To increase income, Lewis and Cherry are proposing to offer sales discounts of 3/10, n/30, and to ship merchandise FOB shipping point. Assume that Damani Dada presently offers no discounts and ships merchandise FOB destination. The sales discounts are predicted to increase net sales by 14%, and the ratio of cost of sales divided by net sales is expected to remain unchanged. Since delivery expenses are zero under this proposal, the expenses are predicted to increase by only 10%. .

Required

. . .

Prepare a forecasted income statement for the year ended April 30, 2006, based on this proposal.

Do you recommend that it implement the proposal given your analysis in part 1? Explain.

Identify any concerns you might express to Lewis and Cherry regarding their proposal.