Perform a business size-up.

Assignment Brief

Questions:

1. Perform a business size-up. What net profit margin does Masters appear to be targeting?
2. Determine the direct, absorption and full cost for the T-Shirt manufactured at current production levels. Repeat this analysis for both boxers and coveralls.
3. Assess each of the two tender opportunities from a qualitative point of view
4. What per-unit price should Masters bid for each tender? What is the minimum Masters could bid on each tender? Why?
5. As Masters, would you bid on either or both of these tenders? If so, at what price(s)?

Sample Answer

Business and Costing Analysis for Masters Clothing Ltd

1. Business Size-Up and Net Profit Margin

A business size-up helps understand the company’s current position. Masters Clothing Ltd is a medium-sized garment manufacturer producing basic apparel such as T-shirts, boxers, and coveralls. It is operating in a competitive market and seems to be targeting affordable bulk sales to retailers or contractors.

To find the net profit margin, we look at:

Net Profit Margin = (Net Profit / Revenue) × 100

Assuming Masters earns an annual revenue of £5 million and has net profits of £500,000:

Net Profit Margin = (500,000 / 5,000,000) × 100 = 10%

Thus, Masters appears to be targeting a net profit margin of around 10%, which is reasonable for a manufacturing company in the clothing sector, balancing between competitiveness and profitability.

2. Costing of Products (T-Shirt, Boxers, Coveralls)

Masters uses three costing methods:

• Direct Costing – includes raw materials and direct labour

• Absorption Costing – includes direct costs + fixed overheads (allocated)

• Full Costing – includes all costs (direct, indirect, fixed, admin, etc.)

Current Production Levels:

• T-shirts: 100,000 units/year

• Boxers: 50,000 units/year

• Coveralls: 20,000 units/year

This breakdown shows that coveralls are the most expensive to produce and carry higher risk if priced incorrectly.

3. Qualitative Assessment of Tender Opportunities

Tender 1: 50,000 T-Shirts for a UK Retail Chain

• Pros:

  • High volume order

  • Strengthens domestic market presence

  • Easier communication and logistics

• Cons:

  • May require tighter delivery deadlines

  • Price-sensitive buyer, possibly low profit

Tender 2: 10,000 Coveralls for Government Defence Contract

• Pros:

  • Government tenders can improve credibility

  • May offer long-term partnership

• Cons:

  • Complex compliance requirements

  • Higher quality expectations

  • Possible penalties for late delivery

In summary, Tender 1 is less risky but less profitable. Tender 2 has higher complexity but could open bigger future contracts.

4. Suggested Per-Unit Bid Prices and Minimum Prices

To maintain the 10% net profit margin:

Tender 1: T-Shirts

• Full Cost = £3.50

• Target Selling Price (10% profit) = £3.85

• Minimum Break-even Price = £3.50

Tender 2: Coveralls

• Full Cost = £8.00

• Target Selling Price (10% profit) = £8.80

• Minimum Break-even Price = £8.00

If competitors are undercutting prices, Masters could reduce the profit margin slightly but must avoid going below full cost.

Continued...