Question

Please answer in full with explanations, There are 2 separate parts.

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 27% 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. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E 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? (Do not round intermediate calculations.) Show less Increase in sales required Required B Required D >

Answer 1

formulas used

sales margin = income/sales

turnover = sales / assets

ROI = margin / turnover

ans c

sales= assets * turnover

=1200,000 * 0.2 = $240,000

income = margin * sales

=27%*240,000 = $64,800

ROI = 27% / 20% = 1.35

now margin is reduced to 20%

keeping the ROI same

new sales = income / 20%

=64800/20% =$324000

thus the increase in sales is (324,000-240,000) = $84000

ans for part c

effect on margin is 20% as mentioned in part b. (decreased from 27%)

margin = income / sales 64800/324,000

effect on turnover

sales/ assets

324,000/1200,000 = 0.27 (increased from 0.2)

effect on ROI

margin / turnover

20%/ 0.27 = 0.74 (reduced from 1.34)