Contribution margins for Lee and Man Handbags

Lee and Man have a good assortment of handbags and luggage that cover all market areas for all those totally normal people who love to buy handbags!  A few samples are below:

Product 1:

Handbag “Chloe”   

Cost: AUD59. Contribution cost: AUD22. Contribution margin: AUD37

Product 2:

Handbag “Tara”

Cost: AUD99. Contribution cost: AUD36. Contribution margin: AUD63

Product 3:

Handbag “Lucia”

Cost: AUD149. Contribution cost: AUD52. Contribution margin:  AUD97

Discuss why the contribution margins for each of your firm’s three products/services might differ or be similar.  Why might your firm produce a range of products/services with different contribution margins? Why not only produce the product/service with the highest contribution margin?

Unless a company was in a niche market, it wouldn’t be good business to only sell or make items in one price range.  It means that a company would only appeal to only 1 section of a potential market rather than a large portion, or all of a market. Considering that Lee and Man specialise in handbags, to make only expensive handbags means that the opportunity cost of missing out on selling more handbags for a cheaper price is potentially quite high. This would also work vice versa, to only sell the cheapest means that you are producing cheap and excluding higher end buyers from your products as people generally associate higher cost with higher quality. A company that did not have variable contribution margins would not be as competitive with other firms that do sell a variety of quality products.

Identify (or guess) one or more resource constraints your firm may face, and also perhaps any market constraints you feel may impinge on your firm.

The possibility of the market being saturated with these products. The pressure to provide a unique product would be high due to the sheer amount of companies that buy, sell and stock handbags. I think the biggest constraint would be the competitiveness of the market which would indicate that prices are likely to be kept at a minimum as the perceived product value must appear to be higher than what a consumer is willing to pay for it to be able to sell.

Selling in bulk as a wholesaler could be seen as a constraint in some aspects regarding low sale prices.  In such a saturated market, Lee and Man would have to be very negotiable on price to ensure they can move a lot of their stock.

In what ways might these constraints be relevant when deciding whether or not (and how much) of the three products or services of your firm that you have identified, your firm should produce and sell?

Possibly a major factor would be the market in which these items are sold and it is likely that Lee and Man sell as a wholesaler and their buyers would be looking to buy in bulk at the right price to be able to sell all of their purchased merchandise. The constraint would be relevant in majority of cases.

Stating that restating is HARD!

Analysing Financial Statements

 When I was reading chapter 4 I felt like I had a firm grasp on Free Cash Flow, and the concept of Operating and Financial Assets, however, when I started to restate my financial statements, I ended up staying up until 3am staring wide eyed at the computer screen thinking I had no idea what was going on and trying to prompt myself to go to bed and finish everything later in the week but not wanting to because I felt I was on the cusp of understanding!

 I have mentioned before that I like to be able to add the numbers together to double check calculations and restating is a perfect way of doing that. I must say that I felt a big sense of relief and pride that I was able to complete the restating with everything adding up at the end for all statement because there was a time when I felt I would give up and drown my sorrows in my kilo tin of milo. I don't think I need to say that I did have quite a few issues:

Issues I had with restating Lee and Man Handbags Financial Statements:

• The main issue was that I thought I had an idea of what some items were, and then when I went to look up on the notes specifically, I was wrong and needed to move an item to a different place. A good example if this is an item called “Translation Reserve” I expected this to be money set aside for translating in the way that I would use this term – changing from one language to another, however the notes indicated that this was regarding exchange rate differences and so I was then required to move the item from Operational to Financial. 

•  I found that the statement of Changes in Equity for 2013 had different amounts for Total Equity from the 31st December 2012 to the 1st January 2013. I didn’t think that one day could make a difference of $1800, and I still don’t! 

• I found the Statement of Changes in Equity the most difficult even though it was the shortest. I felt it was hard to try to get information from both axis of the graph into 1, however when I was able to do that I felt like it was straight forward and I felt as though it was neater – I’m hoping it’s right!

Draft assessment #1

Well hopefully I have most of what is required covered in this document. Please view my draft in the right hand menu bar and let me know what you think! Am hoping to add more to this as I get feedback.

Too many questions!

I have been working on trying to understand more and more about Financial Statements and Lee and Man Handbags by delving into their annual reports.  Today I was in such a deep conversation with the 2014 suite of reports, and had asked it so many questions, that the transcript for this interview was recorded:

                                                                                                     

Statement of Income:  Erin, you have been staring at us a lot of the last few weeks and it’s getting uncomfortable. What is it that you are finding confusing about us?

Erin: Lots of things are confusing.  For starters, some of the terms on the reports are not always self-explanatory. One example is that there is an item on the income statement that just says ‘Other gains and losses’ but is just one number for both the gains and losses. To me it would make sense to have one item as ‘other gains’ and another item ‘other losses’. To understand the components of this item you have to check the notes to see that other losses has already been taken away from other gains and then added to the report as one figure. I felt like this could be more self-explanatory if separated, however, I can see that notes would probably have to be made for these regardless of whether there are listed under one or two items.

Statement of Cash Flows: What about our numbers? Is there any questions you have about Lee and Man's based on the numbers in the reports?

Erin: After an initial look at the numbers I can see that the profit is way down in 2014 from previous years but the Equity is higher than each year previous. I was required to look for further information than just profit being an indicator of healthy finances and to be honest, I’m still not entirely sure! It’s a question I will have to raise amongst students to see if they have experienced something similar with their companies.  I began looking at the Income Statement, and I can see that the Expenses are over HK$50,000,000 more than the previous years. Now I’m not sure why things like the administrative expenses and selling and distribution costs would have increased by this much but I think this could be why the profit looks down because expenses were so much higher. I will have to check over the Statement of Cash Flows when I understand it a little better.

Balance Sheet: I know we can be a bit confusing, but surely there are interesting things. What have you found interesting about us?

Erin: Yes, the story you can make with the financials! The notes are also interesting and very helpful. For 4 pages of reports there are 100+ pages of notes, just to explain the numbers in the reports.  They help you to understand a lot and can even be used as a bit of a glossary in regards to the ‘Significant Accounting Policies’ I have found it to be a good idea to read the specific note for the item on the report and then search through the SAP’s for just a bit more information.

I also like that you can seem to check each statement against the other statements.  The ‘Net Assets’ is on the Balance sheet and indicated as Equity in the Changes to Equity report. The ‘Profit before Taxation’ on the Income Statement is the first thing on the Statement of Cash Flows. This helps me to think everything is in order and it helps to cement that certain things are correct. Eg Net assets = Equity. I also like to be able to double check if I understand something correctly by adding it up myself. Does the Total Equity in the Statement of Changes in Equity equal all of the Assets minus all of the Liabilities from the Balance sheet? Even if it is listed on the Balance sheet as Net Assets, I am glad that I can understand how that figure on the Equity report has come to be.

Another component that I found very thought provoking was the issue of having 'Trading Halts' When I initially looked at Lee and Man handbags, and found that profits were down and then stumbled across a trading halt on their webpage, I thought it meant that the company was going down the plughole.  It has only been since I revisited the webpage that I found that the trading was resumed and it could have nothing to do with how the company is performing.  In this case, the parent company was in negotiations for a sale of their shares in Lee and Man Handbags, which I would think to mean that if the company is in demand, it cannot be failing as terribly as I initially thought.  I would love to know if any other students had a trading halt in their company to see for what other reasons this may come around.

Statement of Changes in Equity: Well we think that we are extremely interesting! Is there anything that you have found hard to believe?

Erin: Yes, one item on my report just stated “Other asset” totalling HK$395,000 with no note linked. I am desperate to know what this is! Taking into account that the equity for that year was HK$284 million, it’s a tiny amount, but still…What is it?! Can they even do that? Any ideas?

Statement of Changes in Equity: No, we are just the vessels for this information to get to the world, Erin! Gosh. Plus I think you’re talking to yourself…

Questions that need answering....

After reviewing the Annual reports for Lee and Man Handbags Holding Limited, it became apparent that after a peak in 2012, the profit margin decreased in subsequent years.

On the 19^th June 2015, Lee and Man made a profit warning announcement to advise shareholders of a potential decrease in profits for year ending 30 June 2015. The decrease in profits was linked to the rising costs of labour in China and price competition from manufacturers in the Philippines and Vietnam.

On the 22^nd June Lee and Man Handbags Holding Ltd released a trading halt notification to announce to shareholders that shares of the company will halt from 9:00am on the 22^nd June on The Stock Exchange of Hong Kong, with no further notice from Lee and Man Handbags since.

This led me to my first KCQ and point of confusion:

KCQ 1: I cannot see a pattern.

I expected that if the profit was high or low then another aspect of the reports would be high or low at a similar ratio. For example, in 2013 and 2014 the revenue was almost spot on equal, and the expenses were fairly close in amount.  I would think that business running costs would be fairly similar during a year – they might employ some more staff or their rent may go up - but their end of year overall profit was decreased in 2014 by over half from that of 2013. Which I thought to be a very large contrast.

 Is it possibly down to different directions?  In 2011, 2012, and 2013, one of the directors was a Ms Poon Lai Ming.  Noted as having 36 years experience in the handbag industry. In the 2014 Annual report of the company,  Ms Poon was not mentioned as a director.  Has the company gone in a different direction, or has needed further direction in relation to the expertise of a long time handbag connoisseur?

Nonetheless, some serious sleuthing has revealed that this is not the end for Lee and Man Handbags. On www.jobsDB.com, Lee and Man Handbags advertised for an Assistant Merchandiser (Handbag), a Merchandiser (Handbag) and a Senior Finance Manager, dated as current as the 7^th July 2015.  Bloomberg’s Business Online indicated that Lee and Man handbag stock were at a 52 week high on the 29^th June 2015. See Article

Unfortunately, L+M Handbags annual reports are released year ending 31st December, so we will not know more until an interim report can be published. Not fair.

Lee and Man Handbags Holding Limited

My company is Lee and Man Handbags Holding Limited, which I have found to be a perfect choice in company for me seeing as I have handbags that are too numerous to count. My interest is vested!

Lee and Man Handbags Holding Limited is a Hong Kong based handbag manufacturing and trading company. The company name implies that Lee and Man Handbags deal in handbags only, but not so. Lee and Man Handbags also manufacture totes, cosmetic bags, back packs, children's bags and luggage.

 In 2011, Lee and Man Holdings spin-off Company “Lee and Man Handbags” became its own independent company with shares being traded on the stock market and reported on in their own annual report in 2011 to 2014.

While Lee & Man Handbags Holding Limited is currently a subsidiary of Full Gold Trading Limited, some secret squirrelling has unearthed an article to advise that on the 22nd June 2015, an unknown buyer made a proposal to buy part or all of Full Gold Trading Limited's shares in Lee and Man Handbags. See Article

Oh the intrigue!  More sleuthing to follow....

Blog 101 - My first blog

Why have I never had a blog? I know that most people would think that it's because I'm an exceedingly interesting person and there is a chance that I could start writing and and all who read will be enraptured with the contents and never be able to live their own lives again without wondering what I am up to each and every day. OR the opposite could be true! I want to say that we'll find out together during our Accounting journey but I feel like I already know the answer and you will too when I tell you about myself.

My name is Erin. I'm 34 years old and the most exciting thing going on this week is that I found out that the official paint colour of my car isn't plain 'white'. It's 'Creamy white' which I think may have increased it's value by about $15.

I've been struggling over this blog for a few days, never really sure what to write. Backspacing everything. Rewriting. I realised that no matter what I write I'm going to look back over it in year and cringe and say "Did you really say that?!" As has happened so many times before on just Facebook alone. So I'm just going to dig in and give it a whirl and who knows, maybe blogging will progress to first place of exciting things happening in my week!