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 33% per year for several years, but turnover has been a relatively low 0.2 based on average total assets of $1,200,000. 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 20%, 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 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 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

a. particulars
given	amount (in $)
average total assets	1200000
turnover ratio	0.2
margin	33%
solution
current sales = average total assets *turnover ratio	240000
net profit= current sales * margin	79200
ROI = net profit /total invetsment*100	6.6

b. particulars
given	amount (in $)
average total assets	1200000
ROI	6.6
margin	20%
solution
net profit = ROI*total investment/100	79200.0
sales= net profit /margin	396000

c.
increase in sales = current sales *.5	120000

d.

the strategy of market research to identify who are the target customer & kicking off a new advertising campaign is a good one as it will help to reduce the cost which will increase the profit margin ratio. Further with the above said strategy sales will also get increased as relevant customer is the target of the company which ultimately results in increase in ROI

e.

other strategy which might help the company is it should also focus in CVP ananlysis as it says how we can reduce our cost as compared to the volume of sales in the organisation