Case Study#1

The NY Fashion Company

From the tenth floor of her office building, Diana Ricks watches her swarms of New
Yorkers watching stores along streets. On this hot July day, she pays particular attention
to the fashions worn by the arious women and wonders what they will choose to wear in
the fall. !er thoughts are not simply random thoughts" they are rooted of her work since
she owns and manages the NY Fashion #ompany, a leader of women$s clothing
company.
%he usually meets her production manger, &ed 'allace, during this month to decide upon
ne(t month$s production plan for the fall line. %pecifically, she must determine the
)uantity of each clothing item she should produce gien the plant$s production capacity,
limited resources, and demand forecasts. Diana relies upon the sales department forecasts
because the items produced ne(t month will appear in stores during %eptember. 'omen
generally buy the ma*ority of the fall fashions when the clothing items first appear in
department stores.
%he turns back to her desk and looks at the clothing patterns designed almost si( months
ago, papers listing the of materials re)uirements for each pattern, and the demand
forecasts for each pattern. %he remembers the hectic and sometimes terrifying days of
designing the fall line and presenting it at fashion shows in New York, +ilan, and ,aris.
-ltimately, she paid her team of si( designers a total of ./00,000 for their work on her
fall line. 'ith the cost of hiring runway models and the renting the conference hall, each
of the three fashions show costs her an additional of ./00,000. %he also paid the
following oerhead costs on her fall line.
+aterial !andling .120,000
,roduction ,lanning Dept. .130,000
%et4up 5ndirect #ost .130,000
%hipping Department .100,000
&otal .6,000,000
!er fall line consists of both professional and casual fashions. %he has determined the
prices for each clothing item by taking into account the item and the prestige of her
company$s brand name.
&he fall professional fashions include tailored wool slack, silk blouse, silk camisole,
tailored skirt, and wool bla7er. ,rice, material re)uirements, labor hours, and machine
hours are shown in &able 6. &he fall casual fashions include elet pants, cotton sweater,
cotton miniskirt, elet shirt and button4down blouse. &he other pertinent information
regarding price, material re)uirements, labor hours and machine hours are shown in
&able 1.
&able 6. ,rofessional clothing items with price, labor hours, and machine hours
re)uirements.
Clothing
Items
Price Materials Requirements a!or hrs
"#$%&hr
Machine hrs
"#1%&hr
&ailored wool
slacks
.800 8 yard of wool
1 yards of acetate for lining
/ 3
%ilk blouse .620 6./ yards of silk 8 9
%ilk camisole .610 0./ yard of silk 1 1
&ailored skirt .1:0 1 yards of rayon
6./ yards of acetate for lining
9 9
'ool bla7er .810 1./ yards of wool
6./ yards of acetate for lining
/ 9
&able 1. #ausal clothing items with price, labor hours, and machine hours re)uirements.
Clothing Item Price Materials Requirements a!or hrs
"#$%&hr
Machine hrs
"#1%&hr
;elet pants .8/0 8 yard of elet
1 yards of acetate for lining
/ :./
#otton sweater .680 6./ yards of cotton 1 1
#otton miniskirt .:/ 0./ yard of cotton 6 1
;elet shirt .100 6./ yards of elet / 3
<utton4down
blouse
.610 6./ yards of rayon 8 8
&ed has told Diana that he ordered 9/,000 yards of wool, 12,000 yards of acetate, 62,000
yards of silk, 80,000 yards of rayon, 10,000 yards of elet, and 80,000 yards of cotton
for production. &he prices of the materials are listed in &able 8.
&able 8. #ost of materials
Materials Cost per yard' #
'ool =.00
>cetate 6./
%ilk 68.00
Rayon 1.1/
;elet 61.00
#otton 1./
>ny material that is not used in production can be sent back to the te(tile wholesaler for
full refund, although scrap material cannot be sent back to the wholesaler.
&ed also informs her that the production of both silk blouse and cotton sweater produces
leftoer scraps of material. %pecifically, for the production of one silk blouse or one
cotton sweater, 1 yards of silk and cotton, respectiely, are needed. From these 1 yards,
6./ yards are used for the silk blouse or the cotton sweater and 0./ yard is left as scrap
material. 5n order not to waste the material, she told &ed to use the rectangular scrap of
silk or cotton to produce a silk camisole or cotton miniskirt, respectiely. 5t means that
wheneer a silk blouse is produced, a silk camisole is also produced. Note that it is
possible to produce a silk camisole without producing a silk blouse and a cotton miniskirt
without producing a cotton sweater.
&he demand forecasts indicate that some items hae limited demand. %pecifically,
because the elet pants and elet shirts are fashion fads, sales department has
forecasted that it can sell only /,/00 pairs of elet pants and 3,000 elet shirts.
!oweer, the company can produce less than the forecasted demand, since the company
is not re)uired to meet the demand. &he silk blouses and camisoles hae also limited
demand because many women think silk is too hard to care for, and sales department
pro*ects that it can sell at most 61,000 silk blouses and 6/,000 silk camisoles.
(eneral hint) +ake necessary assumption?s@ if it is re)uired to do a complete analysis.

a. Formulate and sole a linear programming problem to ma(imi7e total contribution
margins gien the production, resource, and demand constraints.
*int) #ompute unit contribution margin for each of the products as contribution
margin A %ale price B direct costs. &he calculated unit contribution will be used for
the coefficient of the decision ariables of your C, model. 5nterpret your computer
results. &he production plan that you obtain from the computer solution will be used
for parts c through f.
b. &he te(tile wholesaler informs Diana that since another te(tile customer canceled his
order, she can be obtained an e(tra 60,000 yard of acetate. !ow many of each
clothing item the company should now produce to ma(imi7e profitD
*int) &his is a sensitiity analysis. +ake sure the acetate is a binding resource"
otherwise the sensitiity analysis is not re)uired.
c. Determine income statement ?as of the end of Fall@ based on the production plan
deeloped in part a. >ssume all clothing items planned in part ?a@ can be sold in the
market. 5f a clothing item is not selected ?determined by the C, model@, it means it
will not be produced.
d. #alculate the unit profit for each of the clothing items using the traditional olume4
based costing method. -se the optimal production plan deeloped in part ?a@ and the
following basis for allocating oerhead costs.
Indirect cost +llocation ,asis
Designer cost Direct material
Fashion show costs Direct labor hours
+aterial !andling Direct material
,roduction ,lanning Dept. Direct labor hours
%et4up 5ndirect #ost Direct labor hours
%hipping Department Direct material
e. Diana found that some of the clothing items are not competitie in the market. %he
consulted with an agency and found about the >ctiity4based costing method which
would sole the problem. Determine the unit profit for each of the clothing items
using the following cost driers and actiities.
*int) 5f a product is e(cluded by the C, solution obtained in part ?a@, the
corresponding actiities for that item needs to be ad*usted in the same category. For
e(ample, if one of the silk items is e(cluded by the C, solution, assign the
corresponding actiities to the other silk item. -se silk category for silk blouse and
camisole items, cotton category for cotton sweater and miniskirt items, and last
category for elet pants and shirts, tailored slack and skirt, wool bla7er and button
down blouse items. You are free to do any necessary ad*ustment as long as you do
not e(ceed the total unites indicated for each of the cost driers.
Indirect Cost Cost -ri.ers Total /nits
Designer cost E of patterns 600
Fashion %how costs Occupied space 60000
+aterial !andling E moes /00
,roduction ,lanning Dept. E of production orders 100
%et4up 5ndirect #ost E of set4ups /0
%hipping department E of shipments 100
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&ailored wool slacks / 6000 90 6/ 9 10
%ilk blouse 2 =00 90 10 3 10
%ilk camisole 61 6100 /0 6/ 3 10
&ailored skirt 6/ 200 20 80 8 6/
'ool bla7er 69 6800 30 10 : 1/
;elet pants 3 6100 80 80 / 80
#otton sweater 6/ 300 /0 10 9 1/
#otton miniskirt 60 6000 /0 1/ / 6/
;elet shirt / :00 30 6/ 9 10
<utton4down blouse 60 6800 90 60 3 60
&otal 600 60000 /00 100 /0 100
f. 'hat is the financialFeconomic e(planation for the difference between the unit profits
found in parts ?d@ and ?e@.
NoteG assumptions might be re)uired for each part as long as they are made realistically.
Depending on what you assume, solutions will be different from one person to another.
For e(ample, if the optimal solution for any of the clothing items is e)ual to 1 units, you
may impose a constraint to drop it from your solution mi(.
R0P1RT F1RM+T
&he report will be a formal report complete with a &itle ,age, %ummary of #ase %tudy,
and >nswer to Huestions, and >ppendi(es. >ppendi(es are used to include the computer
outputs. Reports will be typed in a standard 61 point font and will be double4spaced on
standard 2./(66 papers with one inch margins on all four sides. &he Reports will be
retained by the department and will be normally considered to be a public document" it
may be made aailable to others on re)uest in the future.