Pepe Case Analysis

As a consultant for the company when conducting a financial analysis for the company the initial fixed cost for equipment is £1,000,000, renovations cost is £300,000 bringing the total to £1,300,000 with operations costs of £500,000. Assuming that new inventory cost is valued at six weeks first we would need to find the yearly cost of sales at 40% which is £80,000,000 (£ 200,000,000 x 40%). Now working within a six week period we would multiply yearly sales by a six week period for a year. This would give us £9,230,000 (6/52 x £ 80,000,000). As mentioned if we use a inventory carrying cost rate of 30% our new inventory carrying cost is £2,769,000 (30% x £9,230,000). After the analysis has been conducted the company would have to pay £3,269,000 a year and we get this by adding the inventory carrying cost to operating cost. Our yearly increase in profit before tax comes to £3,130,000. The investment cost is £1,300,000 which makes our payback period 21.6 weeks. If the company can maintain there good financial standing then this would be a good alternative for the company.

The best alternative for the company as mentioned in the case is to transfer the manufacturing to the United Kingdom. This will allow the company to be more flexible. This would also give there retailers a more comfortable ordering arrangement. With this move to the UK the response time would be reduced. The only problem would be the start up cost which would be paid back due to the financial stability of the company.