Answered Essay: Rent-A-Dress: Renting Fashion for Cheap Rent-A-Dress (RAD) rents out designer fashion apparel to customers who would like to w

Part 1: What is average number of dresses at different stage of Rent-A-Dress process? What is the total average number of dresses Rent-A-Dress owns? (Note that this is the number of dresses RAD needs in order to do business)

Part 2: Using your answer from Question 2, complete the profit and loss statement. What is daily profit earned by Rent-A-Dress (excluding expenses in salaries and rental)?

Rent-A-Dress: Renting Fashion for Cheap Rent-A-Dress (RAD) rents out designer fashion apparel to customers who would like to wear elegant dresses on special occasions but do not wish to purchase them. For example, a customer can rent a S1000 dress for $25 per day for a 10-day rental period. To rent a dress, a customer visits the RAD website which displays the available dresses and their rental prices. On average, RAD sees rental demand of 100 dresses per day. The number of webpage views is actually very large, but not everyone rents. Many leave the website, not finding the dresses they want. To ensure that enough customers do find dresses, RAD keeps 5 days demand (i.e., 500 dresses) in their Rental-Ready Inventory, which includes different styles and sizes. This number must be large due to a variety of dresses RAD keeps as well as the policy that RAD ships two dresses (same style in two different sizes) to satisfy a customers request for one dress. When taking a rental order, RAD requires that a customer specify two sizes for each dress she requests the most likely and second most likely size. This minimizes the customers hassle in returning a dress because of fit issues. Once a customer places a rental order, two dresses (one style in two sizes) are sent to customer via UPS next-day delivery (one- day shipping that costs S5, borne by RAD). At the end of rental period, the customer returns the two dresses in a pre-labeled UPS package. Return shipping takes one day, and again costs S5 borne by RAD Upon its return, a dress is first inspected and classified as either good or damaged. RAD incurs $1 in labor, on average, to inspect and classify each dress. On average, 70% of returned dresses are found to be in good condition and require minimal cleaning, which is performed at QuickClean laundry located next door to RADs fulfillment center. QuickClean charges S5 for cleaning each dress, and after cleaning the dress is placed back in Rental-Ready Inventory. Damaged dresses may require more rigorous cleaning or some repair. These dresses are sent across town to MaxClean laundry. Since MaxClean is farther way, RAD typically batches a number of dresses before sending them to MaxClean. MaxClean charges S10 for cleaning each dress, after which the dress is placed back in the Rental-Ready Inventory Customers typically want dresses from the current fashion trends (and without any wear and tear). To meet this need, RAD regularly buys new dresses and writes-off old dresses. An average new dress costs RAD S750 (substantially discounted from the average retail price of S1000). A new dress has an average life of 125 rental days. RAD depreciates cost of a new dress over 125 days in a straight-line fashion (this is the same as saying that RAD incurs $750/125 -S6 per day on each dress it owns) While there is enough demand for its service, Rent-A-Dress continues to bleed money. As a new CEO, your responsibility is to figure out how to show signs of profitability of this business before going for the next round of funding. Various proposals have been put forward to improve profitability. The following two competing proposals are on your table

Rent-A-Dress: Renting Fashion for Cheap Rent-A-Dress (RAD) rents out designer fashion apparel to customers who would like to wear elegant dresses on special occasions but do not wish to purchase them. For example, a customer can rent a S1000 dress for $25 per day for a 10-day rental period. To rent a dress, a customer visits the RAD website which displays the available dresses and their rental prices. On average, RAD sees rental demand of 100 dresses per day. The number of webpage views is actually very large, but not everyone rents. Many leave the website, not finding the dresses they want. To ensure that enough customers do find dresses, RAD keeps 5 days’ demand (i.e., 500 dresses) in their “Rental-Ready Inventory”, which includes different styles and sizes. This number must be large due to a variety of dresses RAD keeps as well as the policy that RAD ships two dresses (same style in two different sizes) to satisfy a customer’s request for one dress. When taking a rental order, RAD requires that a customer specify two sizes for each dress she requests the most likely and second most likely size. This minimizes the customer’s hassle in returning a dress because of fit issues. Once a customer places a rental order, two dresses (one style in two sizes) are sent to customer via UPS next-day delivery (one- day shipping that costs S5, borne by RAD). At the end of rental period, the customer returns the two dresses in a pre-labeled UPS package. Return shipping takes one day, and again costs S5 borne by RAD Upon its return, a dress is first inspected and classified as either “good” or “damaged”. RAD incurs $1 in labor, on average, to inspect and classify each dress. On average, 70% of returned dresses are found to be in good condition and require minimal cleaning, which is performed at QuickClean laundry located next door to RAD’s fulfillment center. QuickClean charges S5 for cleaning each dress, and after cleaning the dress is placed back in “Rental-Ready Inventory”. Damaged dresses may require more rigorous cleaning or some repair. These dresses are sent across town to MaxClean laundry. Since MaxClean is farther way, RAD typically batches a number of dresses before sending them to MaxClean. MaxClean charges S10 for cleaning each dress, after which the dress is placed back in the “Rental-Ready Inventory” Customers typically want dresses from the current fashion trends (and without any wear and tear). To meet this need, RAD regularly buys new dresses and writes-off old dresses. An average new dress costs RAD S750 (substantially discounted from the average retail price of S1000). A new dress has an average life of 125 rental days. RAD depreciates cost of a new dress over 125 days in a straight-line fashion (this is the same as saying that RAD incurs $750/125 -S6 per day on each dress it owns) While there is enough demand for its service, Rent-A-Dress continues to bleed money. As a new CEO, your responsibility is to figure out how to show signs of profitability of this business before going for the next round of funding. Various proposals have been put forward to improve profitability. The following two competing proposals are on your table

Expert Answer

 

  1. Number of Dresses:
Particulars No. No.
Rental demand per day 100
Rent period days 10
Dresses sent per order 2
Dresses in client’s place      2,000.00
Inventory in transit days 1
Inventory in transit          200.00
Rental ready Inventory 500
Rental ready Inventory sizes 2
Rental ready Inventory      1,000.00
Dresses waiting Inspection          800.00
Dresses waiting to be sent to max clean          120.00
Dresses with MaxClean          120.00
Average no. that RAD owns      4,240.00
  1. Daily Profit calculation:
Particulars Calculation Amount ($) Amount ($)
Income per day 2000*25    50,000.00    50,000.00
Dress depreciation per day 4240*6    25,440.00
UPS Shipping Charges 200*5      1,000.00
Inspection Charges 800*1 800
Quick clean laundry charges 200*70%*5 700
MaxClean laundry charges 200*30%*10 600
Total Cost    28,540.00
Profit daily    21,460.00
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