# Case Analysis Pepe Jeans

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Case: PEPE JEANS Questions: 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…show more content…
With that logic – why can’t Pepe take an approach of maintaining three months of inventory in a warehouse? Sure their carrying cost will increase but there sales may increase by a lot more than 10% if they can give retailers more flexibility and ship the week an order is placed. This approach for their basic jeans seems to make sense. Maybe their “designer jeans” can have a longer lead time and build the anticipation level. However, they need to keep the highest volume jeans flowing to their customers if they do not want to lose sales. Flexible system would lead to an increase in the sales of about 10%. Current sales - £ 200 000 000 10% of £ 200 000 000 would be £ 20 000 000 Profit before taxes(PBT) at the rate of 32 % would mean an increase in the PBT of £ 6 400 000 ( 32% x £ 20 000 000) 7. First alternative Decrease of lead time would lead to an increase in costs by 30%. Currently the yearly cost of sales is 40% of sales of £ 200 000 000 that is £ 80 000 000( 40%x £ 200 000 000) If the cost goes up by 30% it would mean 30% of £ 80 000 000M that is £ 24 000 000 In return for this increase in cost the company could make an approximate increase in the PBT of £ 6 400 000 that would still mean (24 000 000 – 6 400 000) = £ 17 600 000 additional burden on the company. The advantage in this alternative is that the company does not have to make any initial investment but has to incur this additional burden every year. Since no investment is made ,