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Charlies Furniture Store - Accounting and Fiance

ROI analysis using DuPont model. 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 32% per year for several years, but turnover has been a relatively low 0.4 based on average total assets of $800,000. A discount furniture store is about to open in the area served by Charlie's, and management is considering lowering prices in order 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 they currently earned.

c. Suppose that 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 practically double my sales volume to earn the same return? Given the results of your analysis, how would you react to Charlie?

d. Now suppose that 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. Think of an alternative strategy that might help Charlie maintain the competitiveness of his business. Explain the strategy, and then describe the likely impact of this strategy on margin, turnover, and ROI

Solution Preview

Required:

a. Calculate current sales and ROI for Charlie?s Furniture Store.

Using Dupont Equation Return on Investment = Net margin X Turnover
ROI = 32% X 0.4 = 12.8%
ROI = Net Income/Total Assets. Net Income = 12.8% X 800,000 = 102,400
Net Margin = Net Income/Sales. Sales=Net Income/Net margin = 102,400/0.32
Sales = 320,000

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 they currently earned.

If ROI is the same and the total assets are the same, then the net income remains the same at 102,400. The new sales would be 102,400/0.2=$512,000

c. Suppose that 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 ...

Solution Summary

The posting has the solutuion to the Charlies Furniture Store problem relating to calculation of ROI using the Dupont equation.

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