Enzo is the founder and co-owner of a new company named EcoChic Handbags, a company that specializes in producing high-quality vegan leather handbags. The company has gained popularity in recent years due to the increasing demand for sustainable and cruelty-free fashion products. To effectively manage their business, EcoChic Handbags has reached out to you to assist with improving operations and providing more insight into the company. Enzo provides you with financial statements from his first three years of operations and is looking for some help with the numbers. "I'm good at fashion and design, but accounting makes me nervous!" exclaims Enzo. Maxwell, the co-owner chimes in as well, "Yes, I have better things to do than crunch all these numbers! I'm flying to South Africa next week for a VIP safari and hunting trip!"

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.

Enzo states, "I want some details about how my company compares to the industry standards. I'm absolutely certain that we are exceeding standards on every single factor! We're genuinely the best in the business!"

Enzo goes on to add to the list of tasks, "The company is uncertain about which of its expenses are variable or fixed, so we need your assistance with determining this along with what constitutes direct material costs, direct labour costs and manufacturing overhead. It's all so confusing! I have enough on my plate between the designing, sourcing of materials, and running our social media page."

You and your team learn, from a walkthrough of the facility, that 20% of expenses are allocated to the head office and 80% is allocated to the product and design costs.

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 warehouse tour, Maxwell starts to complain, "The partnership doesn't make enough money to meet my lifestyle. I'm looking to maximize profits and I want your advice on how we can cut or manage costs. I'm thinking one of the best places is in the recycled materials. It's become quite costly to process water bottles into polyester and continue to find materials to create sustainable bags. I want to use cheaper material shipped in from Sri Lanka and Vietnam. Also, I'm thinking of outsourcing the labour to Indonesia and Venezuala. With the new rise in minimum wage, it's so much cheaper to have them sew the bags than to continue to pay labourers in British Columbia. Plus, we've printed off all our labels and tags, we can just ship them over there and have them sewn on by the Venezuelans. We're still vegan friendly and sustainable since we're not using leather, so it's fine" Maxwell then dropped his voice to a whisper, "just don't tell Enzo because he can be a bit delusional when it comes to all this sustainability stuff."

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.

Enzo also mentioned to you that he is curious about how many units the company needs to sell to break even and what the current margin of safety is.

He also wants you to prepare a quarterly sales budget for 2024 to 2026. 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. What is the estimated budgeted total revenue per year for 2024, 2025 and 2026? He expects handbag demand to increase by 20% year as well.

EcoChic Handbags has built up an online presence, but Maxwell is considering opening physical retail stores. Maxwell wants your team to prepare an analysis of whether this is feasible for the company. 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. Prepare a return on investment calculation and determine the payback period for this capital investment.

Enzo and Maxwell also want to know what steps they need to take to implement a budgeting process and why it is important to analyze budgets. What key variances should the compare to ensure the profitability and longevity of the company?

Objective: Write a APA-formatted business report analyzing all the accounting, business, and ethical issues raised in the case with detailed recommendations to Eco-Chic's management. Please note that your work WILL be analyzed for similarity and AI use!

State and make any assumptions necessary for your calculations.

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%