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 open in the area served by Charlie'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 mo? ifi reduce my prices as planned, then I have to increase my sales volume by 50% to earn the same return?" Given the results of 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 ROL e. What are the other alternative strategy that might help Charlie maintain the competitiveness of his business Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required Required C Required D Required E

Answer 1

Part A

ROI = (40% Margin × 0.6 Turnover) = 24.0%

0.6 Turnover = (Sales / $3000000 Average total assets)

Sales = 3000000*0.6 = $1800000

Part B

24.0% ROI = (30% Margin × Turnover)

Turnover = 0.80

0.80 Turnover = (Sales / $3000000 Average total assets)

Sales = $2400000

Part C

Increase in sales required = (2400000-1800000)/1800000 = 33.33%

Part D

Margin	Decreases
Turnover	Increases
ROI	Increases

Increase in marketing expenses, increases operating expenses and thus reduces margin.

Marketing efforts increases sales and thus there is increase in turnover. The increase in turnover is more than decrease in margin and thus there is increase in ROI.

Part E

Reduction in inventory carrying costs

Labor saving strategies

It is possible to reduce inventory carrying costs by limiting the inventory stock to those product lines generating the highest margins and/or highest turnover. This will reduce the amount of average total assets.

Sales force should be hired on commission basis, staff reduction during non-peak hours are some of the labor saving strategies that should be implemented.