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Table A: Consolidated Income Statement, 2009-2011 (in thousands of dollars)
2009
2010
Net Sales
14,079
15,065
COGS
9,011
10,244
Gross Profit
5,068
4,821
Operating Expense
3,520
3,615
Interest Expense
105
125
Interest Income
17
19
Pretax Profit
1,461
1,099
Income Tax
497
374
Net Income
964
725
2011
16,360
10,798
5,562
4,090
128
15
1,359
462
897
Table B: Balance Sheet at December 31, 2011 (in thousands of dollars)
Cash
500
Accounts Receiveable
5,245
Inventory
1,227
Current Assets
6,972
PP&E
2,988
Total Assets
9,960
Accounts Payable
Notes Payable, Bank
Accrued Taxes
Long-Term Debt, Current Portion
Current Liabilities
Long-Term Debt
Total Liabilities
Shareholders’ Equity
Total Liabilities and Shareholders’ equity
966
826
139
100
2,031
1,000
3,031
6,929
9,960
Table C: Monthly Sales (in thousands of dollars)
Sales
Projected Sales
2001
2012
January
671
702
February
393
486
March
360
414
April
311
378
May
180
162
June
196
180
July
474
378
August
769
540
September
2,896
2,970
October
2,618
2,520
November
4,564
5,724
December
2,928
3,546
Total
16,360
18,000
Exhibit 1: 2012 Pro Forma Balance Sheets and Accrued Taxes Under Seasonal Production (in thousands of dollars)
Actual
Dec 31,
Jan
Feb
Mar
Apr
May
2011
Casha
Accounts Receiveable
c
Inventory
Current Assets
Net PP&Ed
Total Assets
b
Accounts Payablee
Notes Payable, Bank
f
Accrued Taxes
Long-Term Debt, Current Portion
Current Liabilities
Long-Term Debtg
Total Liabilities
Shareholders’ Equity
Total Liabilities and Equity
Accrued Taxes
Be. Accrued Taxes
Accrual of Monthly Taxes
Tax Payments
End. Accrued Taxes
500
1,511
2,950
2,768
2,477
2,274
5,245
1,227
6,972
2,988
9,960
2,541
1,227
5,280
2,988
8,268
832
1,227
5,009
2,988
7,997
630
1,227
4,625
2,988
7,613
554
1,227
4,259
2,988
7,247
378
1,227
3,879
2,988
6,867
966
826
232
0
160
0
137
0
125
0
53
0
139
100
2,031
1,000
3,031
6,929
9,960
94
100
425
1,000
1,425
6,842
8,268
26
100
286
1,000
1,286
6,710
7,997
(188)
100
49
1,000
1,049
6,564
7,613
(388)
100
(163)
1,000
837
6,409
7,247
(492)
100
(339)
1,000
661
6,206
6,867
26
(75)
(139)
(188)
(188)
(80)
(120)
(388)
(388)
(105)
0
(492)
139
139
(45)
0
94
94
(68)
0
26
a
Assumed maintenance of minimum $500,000 balance
b
Assumed 60-day collection period for wholesale sales and instant collection for retail sales
c
Assumed inventories maintained at December 31, 2011, level for all of 2012
d
Assumed equipment purchases equal to depreciation
e
Assumed equal to 50% of the current month’s COGS for seasonal production; related to material purchases that accounts fo
period. Given that inventories are level, purchases will follow a seasonal production and sales pattern.
f
Taxes payable on 2011 income are due March 15, 2012. On April 15, June15, September 15, and December 15, 2012, payme
estimating its tax liability for 2012, the company uses a tax liability of $480,000. This implies a payment of $120,000 in April, J
g
To be repaid at the rate of $50,000 each June and December.
usands of dollars)
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1,946
1,625
1,246
758
500
500
500
239
1,227
3,413
2,988
6,401
391
1,227
3,243
2,988
6,231
643
1,227
3,116
2,988
6,104
2,457
1,227
4,442
2,988
7,430
3,843
1,227
5,570
2,988
8,558
5,771
1,227
7,498
2,988
10,486
6,489
1,227
8,216
2,988
11,204
59
0
125
0
178
0
980
0
832
785
1,889
80
1,170
847
(715)
100
(556)
950
394
6,007
6,401
(795)
100
(571)
950
379
5,851
6,231
(857)
100
(578)
950
372
5,732
6,104
(757)
100
323
950
1,273
6,158
7,430
(590)
100
1,126
950
2,076
6,482
8,558
(55)
100
2,014
950
2,964
7,522
10,486
111
100
2,228
900
3,128
8,076
11,204
(492)
(103)
(120)
(715)
(715)
(80)
0
(795)
(795)
(61)
0
(857)
(857)
219
(120)
(757)
(757)
167
0
(590)
(590)
536
0
(55)
(55)
285
(120)
111
purchases that accounts for 50% of COGS for 2012. This represents a 30-day payment
tern.
December 15, 2012, payments of 25% of each of the estimated tax for 2012 are due. In
ment of $120,000 in April, June, September, and December.
Exhibit 1: 2012 Pro Forma Balance Sheets and Accrued Taxes Under Level Production (in thousands of dollars)
Actual
Dec 31,
Jan
Feb
Mar
Apr
May
2011
Casha
500
Accounts Receiveable
c
Inventory
Current Assets
Net PP&Ed
Total Assets
b
Accounts Payablee
Notes Payable, Bank
f
Accrued Taxes
Long-Term Debt, Current Portion
Current Liabilities
Long-Term Debtg
Total Liabilities
Shareholders’ Equity
Total Liabilities and Equity
Accrued Taxes
Be. Accrued Taxes
Accrual of Monthly Taxes
Tax Payments
End. Accrued Taxes
5,245
1,227
6,972
2,988
9,960
2,541
832
630
554
378
2,988
2,988
2,988
2,988
2,988
104
100
41
100
1,000
1,000
966
826
139
100
2,031
1,000
3,031
6,929
9,960
139
139
(34)
0
105
104
(63)
0
41
(171)
100
1,000
41
(74)
139
(172)
(372)
100
1,000
(171)
(81)
120
(372)
(484)
100
1,000
(372)
(112)
0
(484)
Cash – Cash should have a minimum balance of $500K
Inventory – use worksheet for Inventory
Accounts Payable – Assume purchases of materials of $5,400,000 is spread evenly over 12 months
Notes Payable, Bank (Line of Credit) – Once you have calculated your current assets you can complete calculation of notes, pa
Accrued Taxes – need to make an adjustment for the accured taxes based on profit. Use worksheet provided (last one in the
nds of dollars)
Jun
Jul
Aug
Sep
Oct
Nov
Dec
239
391
643
2,457
3,843
5,771
6,489
2,988
2,988
2,988
2,988
2,988
2,988
2,988
(717)
100
(807)
100
(880)
100
(743)
100
(547)
100
89
100
320
100
950
950
950
950
950
950
950
(484)
(113)
120
(717)
(717)
(90)
0
(807)
(807)
(72)
0
(879)
(880)
257
120
(743)
(743)
196
0
(547)
(547)
637
0
90
89
351
120
320
plete calculation of notes, payable bank to assess borrowing needs
et provided (last one in the workbook)
Exhibit 2: 2012 Pro Forma Income Statement Under Seasonal Production (in thousands of dollars)
Jan
Feb
Mar
Apr
May
Jun
Net Sales
702
486
414
378
162
180
COGSa
463
321
273
249
107
119
Gross Profit
239
165
141
129
55
61
Operating Expensesb
Interest Expense
Interest Incomec
Profit (loss before tax)
Income Taxesd
Net Income
360
11
1
(132)
(45)
(87)
360
7
3
(200)
(68)
(132)
360
7
5
(222)
(75)
(146)
360
7
5
(234)
(80)
(155)
360
7
4
(308)
(105)
(203)
360
7
4
(302)
(103)
(200)
a
Assumed cost of goods sold equal to 66% of sales
b
Assumed to be the same for each month throughout the year
c
2% annualized rate of return on average monthly cash balances
d
Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheets. The federal tax r
Jul
378
249
129
360
7
3
(235)
(80)
(155)
Aug
540
356
184
360
7
3
(181)
(61)
(119)
Sep
2,970
1,960
1,010
Oct
2,520
1,663
857
Nov
5,724
3,778
1,946
Dec
3,546
2,340
1,206
TOTAL
18,000
11,880
6,120
360
7
2
645
219
426
360
7
1
491
167
324
360
11
1
1,576
536
1,040
360
7
1
839
285
554
4,320
94
32
1,737
591
1,147
ance sheets. The federal tax rate on all earnings was 34%
Exhibit 2: 2012 Pro Forma Income Statement Under Level Production (in thousands of dollars)
Jan
Feb
Mar
Apr
May
Net Sales
702
486
414
378
162
COGSa
421
Gross Profit
281
Operating Expensesb
Interest Expense
c
Jun
180
371
11
d
Additional Interest
e
Interest Income
Profit (loss before tax)
Income Taxes
Net Income
0
1
(100)
(34)
(66)
0
0
0
0
0
0
0
0
0
0
a
Assumed cost of goods sold equal to 60% of sales (Pull the assumption from the case)
b
Operating Expenses – Pull information from the case to inform this line. Operating expenses of $4,320,000 are assumed to be
The $300K increased storage and handling costs should be allocated to each month on the basis of the amount of inventory a
c
Interest Expense – 8% interest charged on previous months balance of long-term debt and 6% interest charged on previous m
d
Additional interest – Additional 5% interest charged on notes payable over $2M
e
Interest Income – needs to consider the 2% annualized rate of return on average monthly cash balances
Jul
378
Aug
540
Sep
2,970
Oct
2,520
Nov
5,724
Dec
3,546
TOTAL
18,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$4,320,000 are assumed to be evenly distributed.
of the amount of inventory at the end of the month as a percentage of the sum of the ending inventory figures for all 12 months
nterest charged on previous months balance of bank loans.
figures for all 12 months
Exhibit 3: 2012 Cash Flow Statement Under Seasonal Production (in thousands of dollars)
Jan
Feb
Mar
Apr
Operating Activities
Net Income
(87)
(132)
(146)
(155)
Depreciation
25
25
25
25
Less: increase (decrease) in A/R
(2,704)
(1,710)
(202)
(76)
Less: increase (decrease) in inventory
0
0
0
0
Add: increase (decrease) in A/P
(735)
(71)
(24)
(12)
Add: increase (decrease) in accrued taxes
(45)
(68)
(214)
(200)
Cash flow from operations
1,862
1,464
(157)
(265)
Investing Activities
Less: capital expenditures
Cash flow from operating and investing
Cash available before financing activities
Financing Activities
Less: bank note repayment
Less: debt repayment
Add: bank note issuance
Cash flow from financing
Total Cash Flow
(25)
1,837
1,837
826
0
0
(826)
1,011
(25)
1,439
2,450
0
0
0
0
1,439
(25)
(182)
2,268
0
0
0
0
(182)
(25)
(290)
1,997
0
0
0
0
(290)
May
(203)
25
(176)
0
(71)
(105)
(178)
(25)
(203)
1,774
0
0
0
0
(203)
Jun
Jul
Aug
Sep
Oct
(200)
25
(139)
0
6
(223)
(253)
(155)
25
151
0
65
(80)
(296)
(119)
25
252
0
53
(61)
(354)
426
25
1,814
0
802
99
(463)
324
25
1,386
0
(149)
167
(1,018)
(25)
(278)
1,496
(25)
(321)
1,125
(25)
(379)
746
(25)
(488)
258
(25)
(1,043)
(785)
0
50
0
(50)
(328)
0
0
0
0
(321)
0
0
0
0
(379)
0
0
0
0
(488)
0
0
785
785
(258)
Nov
Dec
1,040
25
1,928
0
1,057
536
731
554
25
718
0
(719)
165
(693)
(25)
706
706
(25)
(718)
(718)
706
0
0
(706)
0
50
768
718
0
0
Exhibit 3: 2012 Cash Flow Statement Under Level Production (in thousands of dollars)
Jan
Feb
Mar
Apr
Operating Activities
a
(66)
Net Income
b
Depreciation
Less: increase (decrease) in A/R
Less: increase (decrease) in inventory
Add: increase (decrease) in A/P
Add: increase (decrease) in accrued taxes
Cash flow from operations
25
(2,704)
479
(516)
(34)
Investing Activities
Less: capital expenditures
Cash flow from operating and investing
Cash available before financing activities
Financing Activities
Less: bank note repayment
Less: debt repayment
Add: bank note issuance
Cash flow from financing
Total Cash Flow
a
Net Income – reference new net income from exhibit 2 – Level
b
Depreciation – have included
25
(1,710)
25
(202)
25
(76)
May
25
(176)
Jun
25
(139)
Jul
25
151
Aug
25
252
Sep
Oct
25
1,814
25
1,386
Nov
25
1,928
Dec
25
718
Schedule Changes Affecting Inventory (in thousands of dollars)
Month
January
February
March
April
May
June
July
August
September
October
November
December
Finished
Goods
Completed
Actual Sales
900
900
900
900
900
900
900
900
900
900
900
900
COGS
Finished Goods Finished Goods
Finished Goods Beginning of
End of the
Net Change
the Month
Month
*Actual Sales – Use the projected sales of 2012 provided to you in Table C of the case
**COGS @ 60% of Actual Sales as per the case
Calculate – the Finished Goods End of the Month – these values are what you require to populate exhibit 1 – Level Production
Calculation of Accrued Taxes (in thousands of dollars)
Month
January
February
March
April
May
June
July
August
September
October
November
December
Accrued
Taxes Payable
Accured Taxes
Taxes from
on Profits in
at End of
Prior Month Month
Month
Taxes Paid
139
-34
0
105
105
-63
0
42
42
-74
139
-171
-171
-81
120
-372
-372
-112
0
-484
-484
-113
120
-717
-171
-90
0
-261
-807
-72
0
-879
-880
257
120
-743
-743
196
0
-547
-547
637
0
90
89
351
120
320
Taxes payable on 2011 income are due MARCH, 2012. On April 15, June 15, September 15, and December 15, 2012, paymen
25% of each of the estimated tax for 2012 are due. In estimating its tax liability for 2012, the copmany uses a tax liability of $
This implies a pyament of $120,000 in April, June, September, and December.
hibit 1 – Level Production
cember 15, 2012, payments of
any uses a tax liability of $480,00
AUGUST 20, 2012
W. CARL KESTER
WEI WANG
Polar Sports, Inc.
In early January 2012, Richard Weir, president of Polar Sports, Inc., sat down with Thomas
Johnson, vice president of operations, to discuss Johnson’s proposal that Polar institute level monthly
production for 2012. Since joining the company less than a year earlier, Johnson had become
concerned about the many problems arising from its highly seasonal production scheduling, which
reflected the seasonality of sales of skiwear and accessories. Weir understood the cost savings and
improved production efficiency that could result from level production, but he was uncertain what
the impact on other aspects of the business would be.
Polar Sports, a fashion skiwear manufacturer based in Littleton, Colorado, carried production
lines in high-quality ski jackets, snow pants, sweaters, thermal soft shells and underwear, and
accessories such as gloves, mitts, socks, and knit caps. The company produced most of these products
in a wide range of styles, sizes, and colors. Polar had a unique design of skiwear that employed
special synthetic materials for better insulation and durability. The design and color of products
changed annually. Dollar sales of a given product line could vary as much as 30% to 40% from year to
year.
The ski apparel design and manufacturing business was highly competitive. The industry
comprised a few large players and a number of smaller firms. Besides several major competitors in
the market such as North Face, Burton, Karbon, Spyder Active Sports, and Sport Obermeyer, highend designers like Prada and Giorgio Armani had recently entered the technical skiwear market.
Occasionally, a company was able to gain share in that competitive market by developing and
marketing new fabrics and using innovative patterns in a given year; typically, however, competitors
were able to market similar products the following year. Unlike Polar, several large producers had
shifted their major production to Asia and Latin America to save on labor costs, making their
products more competitive in price. Fierce competition in both design and pricing resulted in short
product lives and a relatively high rate of company failures.
________________________________________________________________________________________________________________
Harvard Business School Professor W. Carl Kester and Professor Wei Wang, Queens University, Kingston, Ontario, prepared this case solely as a
basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although
based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities
is coincidental.
Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
Authorized for use only in the course MGMT3320 at University of Guelph taught by Rob Bowman from Sep 05, 2019 to Dec 15, 2019.
Use outside these parameters is a copyright violation.
9-913-513
913-513 | Polar Sports, Inc.
Polar Sports, Inc., was established in 1992 by Richard Weir, a retired professional snowboarder.
His desire was to produce high-quality skiwear and accessories for people of all ages and abilities.
Through Weir’s expansive network of ski instructors and resorts, Polar was able to sell a few
hundred units of high-quality products by the third year of operation.
Polar experienced fast growth since the late 1990s, after sponsoring a number of snowboarding
events and endorsing a few talented athletes who later competed in several international
competitions. Polar became a popular brand among both professional and amateur skiers and
snowboarders. The company’s sales growth was affected only slightly by the 2008–2009 economic
recession. In 2011, Weir hired Thomas Johnson, a production manager at a sports equipment factory,
as vice president of operations.
The skiwear production process, though not complex, was nevertheless labor intensive. It
required designers to constantly come up with new styles to stay ahead of competing products. The
designers worked closely with raw-materials suppliers in developing new fabrics. Focusing on both
the technical and the fashion aspects of their products, Polar’s designers helped create a high-tech
temperature-control fabric for the base and middle layers, providing both breathability and
waterproofing. The production technology required skilled labor, and the process was primarily
manual, which ensured that stitching was accurate and jackets and pants were properly insulated.
Company Financials
The popularity of skiing and snowboarding had grown tremendously over the past two decades.
According to a National Sporting Goods Association survey, at the end of 2010 more than 15 million
Americans over seven years of age participated in skiing or snowboarding. The skiwear
manufacturing industry experienced fast growth in the 2000s with the rising popularity of winter
extreme sports such as snow kiting and heli-boarding. Polar achieved progressive market share
through its unique design and expansive sales network. Its sales grew from $4.65 million in 2001 to
$16.36 million in 2011. With a number of promising new designs under production, sales were
projected at $18.0 million for 2012. However, the ultimate success of the new designs depended
greatly on how well the market would respond. In recent years, more-intense competition had made
accurate predictions increasingly difficult.
Polar’s net income reached $897,000 in 2011 and was projected to be $1,147,000 in 2012 under
seasonal production. Tables A and B show the latest financial statements. The cost of goods sold had
averaged 66% of sales in the past and was expected to remain at approximately that level in 2012
under seasonal production. Operating expenses, projected to be 24% of sales, would be incurred
evenly throughout each month of 2012 under either seasonal or level production. Polar was facing a
corporate tax rate of 34%.
2
BRIEFCASES | HARVARD BUSINESS SCHOOL
Authorized for use only in the course MGMT3320 at University of Guelph taught by Rob Bowman from Sep 05, 2019 to Dec 15, 2019.
Use outside these parameters is a copyright violation.
Company Background
Polar Sports, Inc. | 913-513
Consolidated Income Statement, 2009–2011 (in thousands of dollars)
2009
Net sales
COGS
Gross profit
Operating expense
Interest expense
Interest income
Pretax profit
Income tax
Net income
Table B
14,079
9,011
5,068
3,520
105
17
1,461
497
964
2010
2011
15,065
10,244
4,821
3,615
125
19
1,099
374
725
16,360
10,798
5,562
4,090
128
15
1,359
462
897
Balance Sheet at December 31, 2011 (in thousands of dollars)
Cash
Accounts receivable
Inventory
Current assets
PP&E
Total assets
500
5,245
1,227
6,972
2,988
9,960
Accounts payable
Notes payable, bank
Accrued taxes
Long-term debt, current portion
Current liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
966
826
139
100
2,031
1,000
3,031
6,929
9,960
As noted, sales of skiwear and accessories were highly seasonal, with more than 80% of annual
dollar volume generated from September through January. Table C shows both actual monthly sales
for 2011 and projected monthly sales for 2012. Polar pursued three sales channels: wholesale, catalog,
and online direct sales. Polar’s wholesale channel, which accounted for 70% of sales, included about
1,000 dealers, sporting goods stores, specialty ski stores, and department s …
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