GLOBAL FITNESS SPORTS SUPPLIES

Swapnil and Sajeev had worked out together almost daily for several years. Both were professionals pursuing demanding careers, and both saw exercise as an escape from the daily stresses of the workplace. While they continued to update their workout wardrobes to take advantage of the latest in apparel technology, they lamented the lack of perfect gym bag each time they met at the gym. Swapnil and Sajeev were sure they couldn't be the only ones who found current gym bags inadequate in meeting their needs. Eventually, they decided to pursue a venture to make what they considered the ideal gym bag, one that would incorporate the features they both desired and that would be of a sufficient quality to withstand a regular workout schedule for several years. They each made a modest investment to start their new company- Global Fitness Sports Supplies- and began operating on the side while they continued their respective professional careers.

That had been more than five years ago. The company had grown substantially, had achieved annual sales of over INR1.5 million, and had begun to generate a healthy profit (Exhibit 1 provides an income statement for the most recent year of operation). Swapnil and Sajeev reflected on their success to date, they contemplated what might be possible if they could devote themselves full time to Global Fitness Sports Supplies. They decided to dive deeper into the numbers. They wanted to better understand the impact that alternative decisions they could make about managing costs, changing prices, and different sales volumes would have on the company, so that they could better determine whether pursuing their ventures full time was even a possibility. They both agreed that if they could see annual profit climb to around INR 300,000, they would consider making this a full-time endeavor.

The two owners decided to begin their analysis by gaining better understanding of the costs being incurred to produce and sell the gym bags. They gathered some data to help them in their analysis. First, they compiled data on actual total costs and number of gym bags produced and sold per month for the past 24 months (see Exhibit 2). They noted that they typically only produced the gym bags once they had an order, they were averse to tying up cash in inventory, and pursuing this strategy meant that units produced and sold were the same each month. Second, they compiled detailed data on costs by category for 2 of the 24 months (see Exhibit 3 for a description of each cost category and costs by category). They could have gathered this information for all 24 months, but they decided to start with just 2 months to keep their analysis more manageable.

Upon gathering the data, they were ready to roll up their sleeves and get to work. They had many questions to answer.

Required:

1. With the data and information given in the exhibits, analyze the costs of the company in as many dimensions as possible
2. How would you segregate the fixed and variable costs?
3. How does the analysis you make in question (1) will help managerial functions of Planning, control etc.
4. Suppose you are the finance manager of this company, explain Swapnil and Sajeev as to how decision making is possible with a cost analysis. You can give an imaginary decision-making scenario

Exhibit 1

Income Statement for most recent year of operation

Revenues 18,37,200

Cost of Goods sold 12,74,000

Gross Margin 5,63,200

Selling, and Admin (SG&A) 3,45,000

Profit Before Tax 2,18,200

Exhibit 2

Units Cost

Jan 1000 1,00,000

Feb 1100 1,06,000

Mar 1175 1,05,000

Apr 1250 1,20,000

May 1410 1,28,000

Jun 1520 1,32,000

Jul 1600 1,35,000

Aug 1710 1,40,000

Sep 1800 1,48,000

Oct 1970 1,50,000

Nov 970 1,50,000

Dec 1970 1,20,000

Jan 1510 1,40,000

Feb 1650 1,30,000

Mar 1450 1,15,000

Apr 1200 1,12,000

May 1210 1,30,000

Jun 1900 1,54,000

Jul 1890 1,62,000

Aug 1200 1,12,000

Sep 1210 1,30,000

Oct 1600 1,43,000

Nov 1700 1,48,000

Dec 1850 1,43,000

Exhibit 3 Description of Costs Cost Description Units produced and Sold 1200 1900 Direct Cost of material used to make the gym Rs.36000 Rs.57000 Material bags that could easily be traced to each bag. This included the cost of the material, zippers, shoulder strap, and handles Direct Labor Cost of paying workers who make the 18000 28500 gym bags Rent Amount paid to lease the facility 5000 5000 where the gym bags were made. Depreciation Cost of the equipment used in making 4000 4000 the gym bags. Electricity Cost obtained from the monthly utility 4400 5800 bill for power to provide lighting and operate machinery. Other Cost of materials not directly traceable 19600 21700 manufacturing to each bag (e.g., thread and glue); labor not working directly on gym bag assembly (e.g., maintenance and janitorial costs, setup of equipment, material handling, supplies). Selling Fixed salary paid to sales 8000 8000 representative. Sales Amount paid to sales representative 12000 19000 Commission for each gym bag sold Administrativ General and administrative costs (e-g., 5000 5000 purchasing, accounting, payroll)