Case Analysis Pepe Jeans
Acting as an outside consultant,what would you recommend that Pepe do?Given the data in the case, perform a financial analysis to evaluate the alternatives that you have identified.(Assume that the new inventory could be valued at six weeks' worth of the yearly cost of sales.Use a 30 percent inventory carrying cost rate).Calculate a payback period for each alternative.
Option 2 with an ROI of 5 weeks and increased PBT would be the preferred alternative. (ROI financials will not not over)
Are there other alternatives that Pepe should consider?
I understand the Pepe has a long standing relationship with the agent in Hong Kong. However, I would first look to see what other agents could possibly offer. I know …show more content…
Second Alternative £ 6 400 000 – £ 3 270 000= £ 3 130 000 we get an increase in the yearly profit before taxes Now, the fixed investment made by the company is £ 1 300 000 (calculated above) so the payback period is (1.3/3.13) x 52 = 21.6 weeks . This is the preferred alternative and should be recommended to Pepe.
10. Other alternatives The other alternative that Pepe could consider could be to continue with the current arrangement. It is excellent from the financial point of view but it is vulnerable from the marketing point of view. If Pepe continues to insist on requirements to place firm orders six months in advance with no possibility of amendment, cancellation, or repeat ordering, it is a matter of time before the retailers turned to other manufacturers who allowed more flexibility. Some other alternatives that Pepe could consider could include sourcing its jeans in some other country where there were more cost advantages and greater flexibility. Finally, Pepe could consider the case where the entire manufacturing was transferred to UK, the financial strength of the company could finance it and this step would provide it with