Question

In its Form 10-K Skechers U.S.A., Inc. describes itself as follows: We design and market Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand name... As of February 15, 2015, we owned and operated 119 concept stores, 146 factory outlet stores and 98 warehouse outlet stores in the United States, and 51 concept stores, 33 factory outlet stores, and three warehouse outlet stores internationally The popularity of Skechers' products has increased significantly in recent years. Sales increased from $1,560.3 million in 2012 to $2,377.6 million in 2014. for an increase of 52.4 percent. In the same period, operating income increased from $22.3 million to S209.0 million, for an increase of 837 percent. It should be noted that this growth was not the result of larger acquisitions of or mergers with other companies Required Write a memorandum that explains how a 52 percent increase in sales could cause an 837 percent increase in profits. Your memo should address the following: a. An identification of the accounting concept involved. b. A discussion of how various major types of costs incurred by Skechers were likely affected by the increase in its sales. c. The effect of the increase in sales on Skechers' margin of safety

Answer 1

From the information given in the question we came to know about the increase in sales of Skechers Inc. from 2012 to 2014 by 52.4 percent and also the increase in the operating profit by the 837 percent from 2012 to 2014. The growth in the business of the organisation is only due to their own modes of operation and their own business policies. This growth is not because of the larger acquisition or mergers of the company with other companies.

a. This growth in the business is due to the new opening of the concept stores and factory outlet of the companies both in the USA as well as internationally. Whenever there is a new store opened then the fixed cost associated with that store will remain constant and as a result when the sale increase then the operating margin will increase as because the fixed cost is constant and hence the increase in sale will increase the operating margin as the fixed cost is not considered in calculating the operating margin. When the new stores are opened then the sales will increase. This is how the operating margin increase by 837 percent even after just 52 percent increase in sales. As the number of outlet increase the sales volume.

b. When the new stores or warehouses are opened then the cost related to those stores like rent, salaries of the workeres, electricity expenses, administrative expenses are taken into consideration. When the sales will increase then it will only increase the variable cost associated with the product as the other costs will remain fixed and constant for a year. The rent, salaries and other admistrative and selling expenses will remain constant as a result of which the operating margin will increase.

c. When the sales increaes, then the margin of safety will increae surely as because the cost is fixed and the sales volume after crossing break even sales will increase the margin of safety. Increase in margin of safety is a good sign for the growth of the company in its operations.