ATHLETE WEAR COMPANY CASE STUDY (75 Marks)

 

Athlete Wear Co. is an Irish sports clothing manufacturer for elite amateur and professional athletes. It has recently seen a decline in profitability owing to increased competition from low cost mass production manufacturers and has been outbid for contracts as official clothing supplier for three major international and domestic sporting events. As a result, Athlete Wear is faced with having to suspend its operations immediately unless it can find alternative markets to ensure the business can remain operational. The window to implement a new plan is very tight. Luckily, the production and sales directors had already assembled a team to devise a plan, referred to as ‘Plan Stepdown,’ to diversify the business away from its reliance on the elite sports market. While much of the outline of Plan Stepdown is ready, it still requires input from the finance department. Although the team had intended to present Plan Stepdown at a strategy conference planned for later this year, events have now overtaken them and an emergency meeting of Athlete Wear’s senior management team has been called for next week. The principle agenda items are an assessment of the current level of stress on the firm’s liquidity and a discussion of the proposed Plan Stepdown which, it is hoped, can go into production quickly.

 

To assist with these discussions, you are required to prepare a financial report package for the meeting regarding Athlete Wear’s current liquidity condition and the expected financial implications of the Plan Stepdown proposal under consideration.

 

Your report package must include the following:

Trading, profit and loss account and balance sheet, 30thApril 2020 (20 Marks)
Forecast trading profit and loss for the six months ended 31stOctober 2020, in contribution form.

(20 Marks)

Cash forecast for the six months ended 31stOctober 2020. (20 Marks)
Evaluation of Athlete Wear ’s liquidity position and recommendations to improve it. (15 Marks)

 

     Total (75 Marks)

 

 

You have ascertained the following information to assist with your assessment:

Athlete Wear is registered for VAT and charges 23% VAT on its sales. VAT returns are submitted on-line following the end of each (calendar) two monthly period and payment is made by the 23rdof the relevant month.
Ignore taxation other than VAT.
A loan of €69,000,000 was taken out with Irish Bank plc on 1stMay 2015 and is repayable in full on 1st May 2025.  The interest rate on the loan is 10% per annum, payable quarterly on 1st  August, 1st November, 1st February and 1st May each year.
All Athlete Wear’s sales and purchases are on 30-day credit terms. All other expenses are paid immediately on receipt of invoice.
Athlete Wear depreciates it’s property, plant & equipment on a straight-line basis as follows:

Buildings 40 years
Machinery 20 years
Delivery vans 5 years
Fixtures & fittings 10 years
Office furniture & equipment 10 years

The following appendices are included:

Appendix 1: Trial balance extracted from Athlete Wear ’s records @ 30thApril 2020.
Appendix 2: Details of Plan Stepdown’s new manufacturing line and financial projections for the six months from 1stMay 2020 to 31st October 2020
Appendix 3: Abridged financial statements for two previous years to 30thApril 2019 and 2018 .

 

 

 

Please note that whilst your report package is to include specified statements and reports, it is necessary to include all relevant data and conclusions into the financial assessment to ensure that the full economic impact is considered.

 

Appendix 1 – Trial Balance  @ 30th April 2020

 

Trial Balance as at 30th April 2020

 
€000
€000

Share capital
 
50,000

Retained earnings @ 30th April 2019
 
206,655

Loan
 
69,000

Building (cost)
100,000
 

Building accumulated depreciation @ 30th April 2019
 
25,000

Machinery (cost)
85,000
 

Machinery accumulated depreciation @ 30th April 2019
 
12,750

Delivery vans (cost)
18,500
 

Delivery vans accumulated depreciation @ 30th April 2019
 
7,400

Fixtures & fittings (cost)
14,000
 

Fixtures & fittings accumulated depreciation @ 30th April 2019
 
4,200

Office furniture & equipment (cost)
13,500
 

Office furniture & equipment accumulated depreciation @ 30th April 2019
 
5,400

Inventory @ 30th April 2019
147,500
 

Trade receivables
87,300
 

Bank overdraft
 
15,950

Trade payables
 
45,700

VAT payable
 
6,220

Sales revenue
 
370,000

Purchases
248,750
 

Wages and salaries
62,500
 

Light and heat
7,250
 

Selling expenses
6,500
 

Advertising
3,000
 

Client entertainment
2,750
 

Legal and professional fees
1,500
 

Maintenance and repairs
4,800
 

Motor expenses
6,500
 

Office expenses
3,750
 

Interest expense
5,175
 

 
818,275
818,275

 

 

On 30thApril 2020 the following expenses had not been accounted for. Athlete Wear plans to pay the outstanding amounts on 1st May 2020.

Wages – overtime for April 2020 €3,200,000
Petrol for delivery vans (inclusive of VAT @ 13.5%) €   150,000
Legal fees (inclusive of VAT @ 23%) €1,230,000

Inventory on hand @ 30thApril 2020 is valued at €171,250,000
Amounts due from trade receivables at 30thApril 2020 are expected to be received 50% in May and remainder in June
Amounts due to trade payables at 30thApril 2020 are expected to be paid in full in May.

Appendix 2 – Financial projections for six months ended 31st October 2020

 

Plan Stepdown

Athlete Wear  produce high quality, durable, branded sport wear for athletes. This is an elite market reliant on high profile sporting event endorsements and branding. Having reviewed the success of companies such as lululemon athletica inc., Plan Stepdown proposes to diversify into the general leisure wear market with Athlete Wear’s own version of light-weight sport wear for general leisure use. As this product line will not be elite sport wear it will be less expensive to produce but, as it is important not to compromise Athlete Wear’s quality reputation, it will still be more expensive to produce than competitor products.  Direct costs per unit are forecast as…

Cost type
Per unit

Materials:  €43 per meter (inclusive of VAT @ 23%)
2 meters

Labour:      €15 per hour
7 hours

 

Plan Stepdown will aim its product at the quality end of the leisure wear market and the expected selling price of €250 per unit will reflect this.

 

As it also envisages that the product line expanding in the future Plan Stepdown has provisionally signed up two well-known online ‘influencers’ to promote the product and enhance its marketability for the next six months. These influencers will each be paid €25,000 + VAT @ 23%  per month for the promotion campaign.

 

Other cost projections to be considered are:

Fixed costs
May
June
July
August
September
October
Total

Admin/sales salaries
1,750,000
1,750,000
1,750,000
1,750,000
1,750,000
1,750,000
10,500,000

Light & heat
510,750
510,750
510,750
510,750
510,750
510,750
3,064,500

Selling expenses
1,168,500
1,168,500
1,168,500
1,168,500
1,168,500
1,168,500
7,011,000

Advertising
135,300
135,300
135,300
135,300
135,300
135,300
811,800

Maintenance/repairs
492,000
492,000
492,000
492,000
492,000
492,000
2,952,000

Motor expenses
650,375
650,375
650,375
650,375
650,375
650,375
3,902,250

Office expenses
215,250
215,250
215,250
215,250
215,250
215,250
1,291,500

Depreciation (per depreciation policy)
 

Loan interest (per loan agreement)
 

 

 

Note: The following cost projections have been stated inclusive of VAT as follows:

VAT @ 23%
VAT @ 13.5%

Selling expenses
Light & heat

Advertising
Petrol

Maintenance & repairs
 

Motor expenses (note: €1,872,750 relates to petrol costs)
 

Office expenses
 

In order for this line to be considered successful, it must produce a profit of €12,000,000 by the end of October 2020. No other product will be produced or sold during this period.

 

The sales volume required to meet the profit target will be achieved as a percentage of annual sales as follows:

Month
 

May
10%

June
10%

July
10%

August
10%

September
20%

October
40%

 

Expected sales mix per month is expected to be 30% directly to the public via on-line cash sales in Athlete Wear’s existing on-line store  and 70% credit sales on 30 day credit to retail outlets. It is expected that 50% of credit sales receipts will be received in the month following the sale with the remaining 50% received the following month.

 

Inventory on hand @ 30th April 2020 cannot be used in the new product line. Material for the new production line will be bought in at the start of each month in the required amount to meet that month’s sales. No inventory of material will be held. All material will be purchased on 30 day credit and paid for in the month following purchase.

 

All operating expenses will be paid in the month incurred.

 

Influencers will be paid their endorsement fees monthly.

 

No new investment in machinery or equipment is required for the next 6 months.

 

Appendix 3 – Abridged Financial Statements

 

Income statement for year ended 30th April
2019
2018

 
€000
€000

Sales revenue
456,870
491,677

Less: Cost of goods sold
(295,900)
(323,551)

Gross profit
160,970
168,126

Less expenses
(177,160)
(113,936)

Profit for the year
43,810
54,190

 

 

Balance sheet as at 30th April
2019
2018

 
€000
€000

Non-current assets
 
 

Property, plant & equipment
176, 250
135,870

Current assets
 
 

Inventories
147,500
152,480

Trade receivables
80,350
70,690

Bank
2,950
29,460

Total current assets
230,800
252,630

Total assets
407,050
388,500

 
 
 

Equity and liabilities
 
 

Share capital
50,000
50,000

Retained earnings
206,655
162,845

Total equity
256,655
212,845

Non-current liabilities
 
 

Loan
69,000
69,000

Current liabilities
 
 

Trade payables
43,205
75,465

VAT
32,960
26,320

Accrued expenses
5,230
4,870

Total current liabilities
81,395
106,655

Total liabilities
150,395
175,655

Total equity and liabilities
407,050
388,500

 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Templates

 

 

 

 

 

 

 

 

 

 

 

 

TEMPLATE FOR ATHLETE WEAR COMPANY CASE STUDY

 

Part 1                   Trading, profit and loss account and balance sheet, 30th April 2020

 
€000
€000

Sales revenue
 
 

Less: Cost of goods sold
 
 

Gross profit
 
 

Less expenses
 
 

Wages and salaries 
 
 

Light and heat
 
 

Selling expenses
 
 

Advertising
 
 

Client entertainment
 
 

Legal and professional fees
 
 

Maintenance and repairs
 
 

Motor expenses
 
 

Office expenses
 
 

Depreciation expense
 
 

Interest expense
 
 

Profit for the year
 
 

 

Balance sheet as at 30th April 2020
€000

 
 

Non-current assets
 

Property, plant & equipment
 

Current assets
 

Inventories
 

Trade receivables
 

Total current assets
 

Total assets
 

Equity and liabilities
 

Share capital
 

Retained earnings
 

Total equity
 

Non-current liabilities
 

Loan
 

Current liabilities
 

Bank overdraft
 

Trade payables
 

VAT payable
 

Accrued expenses
 

Total current liabilities
 

Total liabilities
 

Total equity and liabilities
 

 

 

 

 

 

Part 2

Forecast trading, profit and loss account by month for 6 months ended 31st October 2020, contribution format

 
May
June
July
August
September
October
Total

 
€
€
€
€
€
€
€

Sales revenue
 
 
 
 
 
 
 

Less Direct variable costs

Materials cost
 
 
 
 
 
 
 

Labour cost
 
 
 
 
 
 
 

=Contribution
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Less fixed costs
 
 
 
 
 
 
 

Admin/sales salaries
 
 
 
 
 
 
 

Light & heat
 
 
 
 
 
 
 

Selling expenses
 
 
 
 
 
 
 

Advertising
 
 
 
 
 
 
 

Maintenance/repairs
 
 
 
 
 
 
 

Motor/petrol exps
 
 
 
 
 
 
 

Office expenses
 
 
 
 
 
 
 

Depreciation
 
 
 
 
 
 
 

Loan interest
 
 
 
 
 
 
 

Endorsement fees
 
 
 
 
 
 
 

Total fixed costs
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Profit/(loss)
 
 
 
 
 
 
 

 

 

 

 

 

 

 

 

 

 

Part 3

Cash forecast for 6 months ended 31st October 2020

 
May
June
July
August
September
October

Receipts (incl. of VAT)
 
 
 
 
 
 

Receipts from Customers
 
 
 
 
 
 

 
 
 
 
 
 
 

 
 
 
 
 
 
 

Total receipts
 
 
 
 
 
 

 
 
 
 
 
 
 

Payments (incl. of VAT)
 
 
 
 
 
 

Payments to Suppliers
 
 
 
 
 
 

Direct wages
 
 
 
 
 
 

Admin/sales salaries
 
 
 
 
 
 

Light & heat
 
 
 
 
 
 

Selling expenses
 
 
 
 
 
 

Advertising
 
 
 
 
 
 

Maintenance/repairs
 
 
 
 
 
 

Motor expenses
 
 
 
 
 
 

Office expenses
 
 
 
 
 
 

Endorsement fees
 
 
 
 
 
 

Loan Interest
 
 
 
 
 
 

VAT payments
 
 
 
 
 
 

Total payments
 
 
 
 
 
 

 
 
 
 
 
 
 

Net cash  movement
 
 
 
 
 
 

Opening Cash balance

 

 
 
 
 
 
 

Closing cash balance

 

 
 
 
 
 
 

 

 

Note: please show all workings separately

 

 

 

 

 

 

Workings for VAT payment

VAT Return

 

May
June
July
August
September
October

Outputs
 
 
 
 
 
 

VAT on sales
 
 
 
 
 
 

 
 
 
 
 
 
 

Inputs – deductions
 
 
 
 
 
 

VAT on purchases
 
 
 
 
 
 

VAT on light & heat
 
 
 
 
 
 

VAT on selling expenses
 
 
 
 
 
 

VAT on advertising
 
 
 
 
 
 

VAT on maint/repairs
 
 
 
 
 
 

VAT on motor expenses
 
 
 
 
 
 

VAT on office expenses
 
 
 
 
 
 

VAT on endorsement fee
 
 
 
 
 
 

VAT amount recoverable
 
 
 
 
 
 

Net payable
 
 
 
 
 
 

Payment
 
 
 
 
 
 

 

Part 4

Liquidity analysis

 

 

Ratio analysis

 

2018
2019
2020

Current ratio
 
 
 

Quick ratio
 
 
 

Receivables days
 
 
 

Payables days
 
 
 

Debt to equity
 
 
 

 

 

 

Observations on liquidity