Managerial Accounting

Preedy Price Limited is a small fashion company run by two sisters, Anne Preedy and Amelia Price. They have been very successful in marketing a range of very exclusive and expensive knitwear through small specialist retail outlets. The company has been approached by a large retailer, Shield & Flagg plc, which would like to market a cut-price version of some of the sisters’ exclusive designs. Shield & Flagg’s buyer assures the sisters that this would be a very good opportunity for them to make high volume sales and to make a lot of money. She estimates that volumes of up to 35 000 garments per year are quite feasible. The maximum number of garments the sisters have produced and sold in one year to date is 5600. Production could be handled by some of Shield & Flagg’s regular knitwear production factories, or the sisters could set up their own large-scale production facilities. In order to make the launch of the new lines successful, however, inventories of around 20 000 items would have to be available in advance of the items going on sale in Shield & Flagg’s 35 stores around the country. What factors (both financial and non-financial) should the sisters take into consideration in deciding whether or not to take up this new opportunity?

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