Polar Sports, Inc. is a fashion skiwear manufacturing business based in Colorado, and produces high quality ski jackets, snow pants, sweaters, thermal soft shells, along with accessories. The Ski apparel design and manufacturing business was highly competitive, causing dollar sales of any product to vary as much as 30% to 40% from year to year meaning it has become increasingly difficult to accurately predict sales. Because of this highly competitive market both design and pricing resulted in short product lives and high rate of company failures. The decision the company faces is to change it manufacturing process from seasonal production to level production. Under seasonal production they greatly expanded their workforce paying large amounts
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Although with level your net income is higher by $388,000 you are adding more risk to the company in a market that is already known for high company failures. Under level production the average inventory is $3,914,000 compared to 1,227,000 that is an increased risk of $2,687,000 in inventory which could become obsolete during the year. Also they have a large increase in leverage due to large notes payable from the bank, meaning if the extra inventory does become obsolete they may not be able to pay off their loan. Although with level production the company may not have to spend as much money on PP&E as the machines won’t take on as much wear and tear. Under the seasonal production although net income is lower, the company has less risk overall. This production would be good in helping the company design and produce products before they become obsolete, although the company will have a higher cost of goods sold, they do lower operating expenses. They also have lower leverage as the notes payable with the bank is lower than with seasonal, meaning they have a lower probability of defaulting on their debt. They may have to spend more on PP&E as the machines wear out quicker but they can take out money through notes payable to the bank to finance the PP&E purchases. The biggest thing is the company is looking to finance its inventory through notes payable with the bank. Looking at the ROA during level production it is approximately 13% while the company is paying around 11% on the loan, the ROA during seasonal is about 10% with 6% on the loan. The company is able to have a better spread during seasonal meaning the company is making more on its assets during seasonal than level. By keeping the production at seasonal they should be able to hedge their risk against the business failing and not being able to meet its financial
Although with level your net income is higher by $388,000 you are adding more risk to the company in a market that is already known for high company failures. Under level production the average inventory is $3,914,000 compared to 1,227,000 that is an increased risk of $2,687,000 in inventory which could become obsolete during the year. Also they have a large increase in leverage due to large notes payable from the bank, meaning if the extra inventory does become obsolete they may not be able to pay off their loan. Although with level production the company may not have to spend as much money on PP&E as the machines won’t take on as much wear and tear. Under the seasonal production although net income is lower, the company has less risk overall. This production would be good in helping the company design and produce products before they become obsolete, although the company will have a higher cost of goods sold, they do lower operating expenses. They also have lower leverage as the notes payable with the bank is lower than with seasonal, meaning they have a lower probability of defaulting on their debt. They may have to spend more on PP&E as the machines wear out quicker but they can take out money through notes payable to the bank to finance the PP&E purchases. The biggest thing is the company is looking to finance its inventory through notes payable with the bank. Looking at the ROA during level production it is approximately 13% while the company is paying around 11% on the loan, the ROA during seasonal is about 10% with 6% on the loan. The company is able to have a better spread during seasonal meaning the company is making more on its assets during seasonal than level. By keeping the production at seasonal they should be able to hedge their risk against the business failing and not being able to meet its financial