Question

Charlie's Furniture Store has been in business for several years. The firm's owners have described the store as a "high-price, high- service operation that provides lots of assistance to its customers. Margin has averaged a relatively high 40% per year for several years, but turnover has been a relatively low 0.6 based on average total assets of $3,000,000. A discount furniture store is about to arlie's, and management is considering lowering prices to compete effectively. Required: a. Calculate current sales and ROI for Charlie's Furniture Store. b. Assuming that the new strategy would reduce margin to 30%, and assuming that average total assets would stay the same, calculate the sales that would be required to have the same ROI as Charlie's currently earns. c. Suppose you presented the results of your analysis in parts a and b of this problem to Charlie, and he replied, "What are you telling me? If I reduce my prices as planned, then I have to increase my sales volume by 50% to earn the same return?" Given the results o your analysis, what is the actual amount of increase in sales required? d. Now suppose Charlie says, "You know, I'm not convinced that lowering prices is my only option in staying competitive. What if were to increase my marketing effort? I'm thinking about kicking off a new advertising campaign after conducting more extensive market research to better identify who my target customer groups are." In general, explain to Charlie what the likely impact of a successful strategy of this nature would be on margin, turnover, and ROI. e. What are the other alternative strategy that might help Charlie maintain the competitiveness of his business,

Answer 1

Charlie Furniture Store
Data Given
Margin per year	40%
Turnover ratio	0.6
Average Total Assets	$3,000,000
1. Calculation of Current Sales and ROI
Formula
Asset Turnover ratio = Total Sales/Average Total Assets
Asset Turnover ratio = 0.6
Average Total Assets	$3,000,000
0.6 = Total Sales/ $3000000
Therefore Current Total Sales =	$1,800,000
ROI Formula
ROI = Net Profit Margin/ Total Investment * 100
Total Investment in this case Total Assets in business
Net Profit Margin = (Sales * 40%)	$720,000
ROI =	24%

2. Assuming that the new strategy would reduce margin to 30% and assuming that average total assets would stay same
calculate sales that would be required to have the same ROI
Margin per year	30%
Average Total Assets	$3,000,000
ROI	24%
ROI = Net Profit Margin/ Total Investment * 100
Given
ROI and Total Investment calculate net profit
therefore,
24% = Net profit margin / $3000000 *100
Net profit =	$720,000
Margin	30%
Total sales = ($720000/30%)	$2,400,000

3. Increase sales volume by 50% to earn the same return
If you increase sales volume by 50% in each of above case
	Current Sales	Revised Sales (+50%)	Same return	Revised % of profit Margin
case 1 Sales	$1,800,000	$2,700,000	$        720,000	27%
case 2 Sales	$        2,400,000	$3,600,000	$        720,000	20%

4. Impact of Successful marketing strategy on margin, turnover and ROI.
A well-defined marketing strategy leads to an increase in the business sales.
This directly impacts the revenue generated as the more you reach out to people, the more they reach out to your business or brand.
Of course, the marketing of a business is directly related to the sales it generates.
While defining your marketing strategy, you should also estimate how much of an increase in revenue or sales you expect the strategy to bring about.
When market strategy focuses on quality, market share, employee productivity and customer satisfaction all increase.
Quality in this sense means meeting and exceeding customer expectations.
Advertising reinforces those expectations, and achieving high levels of customer satisfaction consumes fewer resources.
These savings, combined with increased volume from higher market share and better productivity, result in higher profits.