Alan Holding owns 40% of the shares of Warwick Clothing Ltd and manages the business. The company supplies specially designed clothing to other businesses. Its most popular items include jackets and coats carrying the names and logos of businesses, company uniforms and customised sportswear. Alan is keen to see his business grow.
Despite operating in a competitive market in which overall demand has been falling, Warwick Clothing Ltd has enjoyed rising sales. This has been due to winning large orders from major business customers such as Tesco.
However, profitability has been a concern for the company’s shareholders. The company has also suffered from declining levels of customer service shown by the rising number of customer complaints.
Some of the company’s key financial data are shown in Figures 1 and 2 below.
Figure 1: Financial Date for 2009-2010
£000s
| |
Sales revenue
|
46,200
|
Fixed costs
|
12,220
|
Labour costs
|
15,500
|
Material costs
|
13,425
|
Fuel and other costs
|
3,900
|
Figure 2: Financial and Operations Data
2008-2009
|
2007-2008
| |
Sales revenue (£000s)
|
£45,250
|
£42,125
|
Net profit margin
|
4.1%
|
4.9%
|
Capacity utilisation of factory
|
88%
|
81%
|
Unit cost
|
£14.88
|
£14.01
|
Satisfaction with customer service
|
74%
|
87%
|
Because of low levels of profitability, Alan has implemented a piece-rate system of pay which has proved unpopular with some workers, although there is some evidence that unit costs have started to fall since 2009. In addition, he has cut expenditure on training. These decisions may have contributed to the company’s level of labour turnover rising from 10% to 25% over the past year.
The company has also had problems with cash flow and has exceeded its overdraft limit several times. Alan has taken action to delay outflows of cash wherever possible.
The company’s factory has been operating near to full capacity in recent months. Alan was delighted to win a very large order to supply an airline with uniforms if 90 days’ trade credit was offered and high standards of quality were achieved.
The order was initially for six months with the possibility of a further three-year contract. To meet the initial order, Alan decided to sub-contract the work to a supplier in Vietnam who has low costs and was recommended to him by one of his customers. Alan believes that this will be the best way to supply the airline’s order.
1 [a] Calculate Warwick Clothing Ltd’s net profit margin for the 2009 – 2010 financial year (6)
1 [b] Discuss which poses the greater threat to Warwick Clothing Ltd’s future success: problems with cash flow or low levels of profitability. (15)
