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 severa relatively low 0.6 based on average total assets of $3.000.000. A discount furniture store is about 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 tell me? If I reduce my prices os planned, then I have to increase my sales volume by 50% to earn the same return?" Given the result 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 I 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

1. The turnover is 60% of average total assets. So, sales will be $3,000,000*60%= $1,800,000

Return On Investment= Margin* Turnover

= 0.4*0.6

= 0.24 or 24% OR

Return on Investment= Return or profit/ Average total assets

= 720,000/3,000,000

= 24%

2. While being ROI the same and the margin becomes 30% the required turnover would be;

ROI= Margin* Turnover

0.24= 0.3* Turnover

Turnover= 0.24/0.3

= 0.8 or 80%

Required sales amount is; $3,000,000* 80%= $2,400,000

3. The new strategy of the company is to lower the prices, this would reduce the margin from 40% to 30%. The price reduction opted by the company should be accompanied by increase in the sales volume. if not, the strategy would fail. The sales amount required after the new strategy in place while keeping the ROI intact is $ 2,400,000. The current sales is $ 1,800,000. The amount of increase in the sales amount is $ 2,400,000- $ 1,800,000= $ 600,000

4. The new strategy put forward by Charlie to start a new advertising campaign to identify the true and potential customers and directing the marketing efforts to them will be beneficial if made successfully. A successfully placed advertising campaign targeted at the potential customers can definitely bring sales to the company. So, the company can ensure more turnover by not lowering the prices. This can increase the turnover ratio. At the same time the increased advertising and marketing expenses will impact the margin. The more the expenses than the increased sales amount will reduce the margin. There should be a balance between the cost and benefit of undertaking the advertising campaign. The cost of the campaign and the related benefit of increase in sales needs to be worthy. Otherwise the margin will decrease. The decreased margin will affect the Return On Investment. While the investment or total asset remains the same and the margin decreases, the ROI will also decline.

5. Charlie can resort to product differentiation. He could differentiate his products from those offered by the competitors in certain attributes. Depending upon the level of differentiation made, he could charge price differently. He could charge higher price than the competitor if the product offered by him is of superior value than competitor.

He could enter into new markets. He could diversify his marketing and promotional activities to include new market segments. He should attract new customers while retaining the existing customers. He could focus on niche markets.

Other way to remain competitive while protecting his turnover and margin requirements is to lower the costs. He could increase his margin by lowering the cost of production. He should take a complete cost analysis and value chain analysis to determine non-value adding activities and eliminate or reduce them. This can lower the costs or eliminate unwanted costs.This will maintain his ratios in better position.