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 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

Refer the below images for the above asked questions, in a detailed way of solution with explanation.

solution: a) Rora (407 margin & oef Gurnover) = 240% 0.6 Turnover & rsales | $300 Boob Average : Sales $1800000 total assets) 244 Roi = (301. Margin * Turnover) Turnover 20.8 Off Tornover = (Sales 1&3000000 Average - Sales $2400000 total assets) ) If margin were reduced from you to Jolo Nia the price towering strategy, sales would have to increase by &600000 (from $1800 000 to 2400000) for Charte to eam the same 24t. Rol. This represents a 33-34 and over the original sales volume, which is not require avuite as severe os Charles makes it sound with his Joto estimate, but his point is certainly well By increasing marneting efforts (rie. Licking off a new advertising campaign, or conducting more extensive market research) cho would also be increasing the the operating operating expenses of expenses of this bosiness, which would reduce margine However, successful are likely to increase sales volone enough to cause the resulting increase in tornomer to more than offset the decrease in margin & Aso result, DoT wa incely to increase

e) solution approach : The following strategies Considering for a "high-price, high - Service Store when faced with new Empetition : may be worth metal furniture * Reduction in Inventory carrying costs & Via Careful screening of existing inventory. For a forniture Store, the inventory available for sale and the building the store is located in are normally ne largest assets on the balance Sheet in the short team, there is probably not moth that charle can do to control ning occopancy costs. However, it charlie were to list to those prodat kines that generate the highest margins and cor) highest turnover this may allow him to Substantially reduce average total assets. By reducing average assers, furnover increases, thereby increasing Ros. An important point to remember when considering the Dupont model of Roc analysis is that asset utilization (ie, Furnores is just as important as generoting high prohr margins a his inventory to those product & labor Saring Strategres& might also be worth considering. Although the problem does not give much information to work from, one might enter that a high service" forniture Store would be treely to have a large sales force relative to its total floor space. If this were the case, then chartie my benekt by Veltructuring his sales force (ner pay based Commissions only, and I ar reducing Staff numbers aur non pear toors). If this could be done without compromising Charles "high service" compentive advantage (ie lost due to a " lower lower Service "), Service & then savings then the the labor cost lak would increase the company's margin, and the Increase not. advantage (ie no sales "petitive