To start up a business, investment appraisal technique is used as attempts to measure the social costs and benefits of a project. It may be used for decisions such as location, purchasing factories or contract, purchasing equipment or rent or marketing campaign. Assets are needed as requirement to start off the business and cash inflows must match their cash outflows for a business to survive. This is when it is break even where total revenue is the same as total costs. At this point the business is making neither a profit nor a loss. If this does not happen, the production will face loss and will not be able to pay its way for long term production. The break-even analysis analyzes costs into fixed or variable types, and is valuable because it calculates the point at which the business starts making a profit. For a big brand name such as Nike, the price is very unlikely to be inelastic since people buy the products for the prestige of the brand.
To grow a business, you need extra finance to buy more assets and to meet expenses so that it can expand. There are many types of costs the business has to pay for from the profit. It can be maintenance cost, advertising, wages and salaries, administration, delivery costs, electricity costs etc. These are the costs which are not directly related to producing goods. Therefore they are called overheads [indirect costs]. A direct cost is one that is directly linked to production such as the raw materials used for it.
The last 30 years have seen remarkable changes in the production of Nike. When the costs of production began to increase in the United States and Europe, and workers organized and exercised collective bargaining power, sports shoe companies like Nike relocated their factories or sought subcontractors in Asia where wages were much lower and where systematic repression of labor movements promised a tame workforce. Western Europe was around $7 per hour, in China, only $0.3 per hour or $2.00 per day. This explains why most of the contracted factories of Nike exist in China. It is a great opportunity to market the products after production within a country like China where a great number of population could be the consumers. They are currently number one athletic brand in China. Nike began to subcontract and outsource the shoe production to lower cost producers in third world countries, medium and small-scale companies in East Asia, particularly Taiwan and South Korea.
Today Nike is operating and contracted with over 20 countries worldwide, 180 factories world wide which 1/3 of the factory is in China. China is currently now the biggest shoe producing country in the world, making the world's top brand-name sports shoes. Nike employs over 18,000 workers in china.
Breakdown of costs for a pair of Nike shoes from an Indonesian plant
Production labour $2.75
Materials $9.00
Rent, equipment $3.00
Supplier's operating profit $1.75
Duties $3.00
Shipping $0.50
Cost to Nike $20.00
Research and development $0.25
Promotion and advertising $4.00
Sales, distribution, admin. $5.00
Nike's operating profit $6.23
Cost to retailer $35.50
Retailer's rent $9.00
Personnel $9.50
Other $7.00
Retailer's operating profit $9.00
Cost to consumer $70.00
Breakdown of costs for a pair of Nike shoes from a China plant
Production labour $1.25
Materials $9.00
Rent, equipment $3.00
Supplier's operating profit $1.75
Duties $2.00
Shipping $0.50
Cost to Nike $17.50
Research and development $0.25
Promotion and advertising $4.00
Sales, distribution, admin. $5.00
Nike's operating profit $6.23
Cost to retailer $33.00
Retailer's rent $9.00
Personnel $9.50
Other $7.00
Retailer's operating profit $11.50
Cost to consumer $70.00
The profit Nike is making for a pair of shoes will depend on the cost of production. There are a wide range and Nike brands suck as Nike Tennis, Nike air, Nike max, Nike dunk, Nike shox etc. Cost of production can vary from materials used in different branded shoes and cost of labor and production across different countries. These are the direct costs which include fixed and variable costs which directly concerns to the production. The cost of labor and materials are cheapest at China. For the same brand pair of Nike, it costs Indonesia plant $20 when it costs China $17.50.
By working with Indonesia, they receive a gross profit of $50 from $70 dollars product and with China they receive $52.50 dollars per pair. However the Indonesia and China are the most cost benefit for their production compare to other countries. That is why for global corporations like Nike, it is important to choose a location where it saves the direct costs to the production.
Consumers buy Nike shoes not only for the comforts of use and convenience, but also paying for the brand name. The final selling price is affected 30-40% percent by brand name and advertising cost sometimes more than its core value. The actual cost of making a pair of Nike is from 88cents to 20 dollars depending on the brand and the shipping and tax cost around 4-6 dollars per pair. A pair of Nike Air force is available at the shops at $150 dollars when it actually cost $15 dollars to make it. It costs them 10% of the selling price to make a product.
The indirect and direct cost of the final product includes expenses for their flashy show rooms, raw materials, packaging, taxes, advertising, transportation and Shipping costs. Nike basically uses upper made leather, phylon, polyurethane, phylite, EVA, BRS 1000 (Carbon Rubber), Solid Rubber, Durable Rubber Compound, Duralon, Gum Rubber as raw materials in making their shoes.
Gross profit or sales profit or gross operating profit is the difference between and the cost of making a product or providing a service, before deducting , , , and payments. At the fiscal year end of 2006 may, Nike have made a gross profit of 6,587millionand at the fiscal year end of 2007, the gross profit increased by around 600million making $7,160million.
Net income is equal to the that a firm has after subtracting costs and from the total . It is also known as profit. At the fiscal year end of 2006 may, Nike have made a net income of $ 1,392 million dollars and at the fiscal year end of 2007, the net income increased by around $100million dollars making $1491 million dollars.
I have worked out that the Sale of Nike has increase in the past 6 years of an average of 11.46% growth showing a growth in revenue of company’s success. Nike reported net revenues of $15.0 billion, a 9 percent increase from FY05.It grew by 7% from 2006 at the fiscal 07.
The variances in cost to be concerned are variable costs such as labor costs and material costs in the long run. The prices of sneakers are going up prices compare to what it used to cost back in 30 years. Within 10years from now on, the price for the same pair of sneakers could go up twice. The decision to produce a product is mainly concerned with the indirect costs to the production. With the amount of profits percentage they are receiving, in the case of Nike, elasticity in cost is not very likely to face loss. It could affect the percentage of profit due to costs in production. Therefore as a financial forecast, there maybe a time for Nike to find alternative sources or increase investment to earn a higher returns. Their goal is to reach 21billion by the fiscal year end of 2011. To reach 21billion, their income must increase up to 16%. By the end of 2007, the Sale of Nike has increase in the past 6 years of an average of 11.46% growth showing a growth in revenue of company’s success.
References
www.yahoo.com/finance