Harrington: Cost and Variable Costs

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Harrington Case Analysis
Issue
Stagnant sales performance has caused Harrington Collection to explore new avenues for improved performance, including the launch of a new active-wear line. Recognizing an emerging trend of low price and rapid style turnover in the women’s apparel market, along with tremendous growth in the active-wear segment, Harrington needs to work strategically to capture this profitable market opportunity. After careful analysis, it was determined that Harrington should implement a new active-wear line.

Financial Analysis
While doing the financial analysis it is important to calculate the unit price first. Using the wholesale price rather than the retail price, the calculated unit price is $95. Next, we sum up the start-up costs and operating costs, both fixed and variable, and use these numbers to calculate the breakeven units. After calculation, the breakeven point is 289,846 units. Appendix A shows the details of our process.

Active-wear sales are expected to double by 2009, and 40% of those sales are expected to be classified as ‘better’ active-wear. Assuming that Harrington Vigor maintains their 7% market share, we can deduce that Vigor can expect to sell 420,000 units of active-wear in its first year. Over half of all apparel purchased is sold “on sale.” We accounted for these markdowns by assuming that half the units will be sold for full price, and the other half will be sold at a discount. A sensitivity analysis was conducted by calculating the discount rates at 20%, 40% and 60% separately. From Appendix B, we can see that even for the 60% discount rate, the profit margin is still up to 21%, which is quite attractive. Therefore, Harrington has strong financial forecast to support its new launch in active-wear segment.

Market trend
After the economic downturn in the early 2000s, the trend of price-sensitive and more than 50% discount sales volume drive the mature market to a low-cost and outsourcing...
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