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!