APPENDIX A - Pearson Education



ANSWERS TO COMPUTER-BASED EXERCISES IN RETAIL MANAGEMENT

OVERVIEW

Each of the components of Computer-Based Exercises in Retail Management are intended to reinforce material; to allow your students to manipulate controllable retailing factors and to see their impact on costs, sales, and profits; to have your students understand better the impact of uncontrollable factors; and to have your students gain experience in using a EXCEL to assess retailing opportunities and solve retailing problems. All 10 exercises are designed to be handed in for class assignments or for the instructor's own use. They are balanced in terms of subject and level.

These are some features of Computer-Based Exercises in Retail Management:

1. They are linked to major concepts discussed throughout Retail Management: A Strategic Approach, 12E. For example, text page references are provided for each of the computer-based exercises.

2. The software operates using EXCEL for both MAC and IBM compatibles.

3. Students are encouraged to manipulate data and compare results attained under different assumptions. This provides them with “hands-on” experience.

4. Each component is “real-world” based.

5. All of the exercises are user-friendly. Directions are self-prompting. All exercises can be accessed from a main menu. Students can easily refer to previous screens or skip screens. No knowledge of computers, programming, or spreadsheet software is required. All screens can be printed.

6. A “learn by doing” strategy is used. Students can alter store image characteristics, questionnaire responses, markups, operating expenses, square footage, travel time, net profit ratios, asset turnover ratios, financial ratios, purchase commitments, and other factors, and see the effect on sales, profits, trading area size, cash flow, and so on.

7. The techniques in the exercises vary widely to maximize student interest and diversify the learning environment. Included are trading-area charts, cash flow statements, accounting methods, financial statements, open-to-buy reports, tabulation and cross-tabulation charts, profit-and-loss statements, and ratios.

8. The exercises can be used to reinforce concepts in the text or further expand student knowledge.

9. After setting up this software, the student's name and class section will appear at the top of every screen and on any pages that are printed from the screen.

TEACHING HINTS

You should be aware of a number of important concepts in planning to use Computer-Based Exercises in Retail Management with your classes:

10. You need to decide the role of Computer-Based Exercises in Retail Management in your course: For example,

--What part will the exercises have in a student's grade?

--What will be the basis for grades (exercise answers, computer printouts, profitability, and/or team presentations)?

--Will the computer assignments be started at the beginning of the course? …towards the end of the course?

--How many exercises will be used? Will all questions be assigned?

--Will the assignments be rotated each semester to prevent student copying?

--How will the discussion of class topics be integrated with Computer-Based Exercises in Retail Management.

11. You should clearly list all course requirements relating to the computer assignments in the course outline--including assigned exercises, due dates, and acceptable formats (e.g., typewritten, double-spaced).

12. You should make sure that each student places his/her name, class, and section on his/ her disk using the Reset Name/Class option that is available when opening this program and on the Main Menu screen. This information will then be contained on each output screen. The listing of name, class, and section on the disk prevents students from submitting assignments done by others.

13. You should consider making provisions with your college’s university’s Computer Center to put the exercises on the network for students who do not have their own computer or access to a computer.

14. You can allow students to do the first exercise on a trial basis. This enables them to determine your expectations without affecting their grades.

15. Encourage students to work out practice decisions prior to handing in assignments.

HOW TO USE THE MAIN MENU

When using the diskette, all exercises can be accessed from the MAIN MENU screen. The menu is arranged in the same order as the topics appear in the text and shows page references so that students may review concepts before (or while) doing an exercise:

COMPUTER-BASED EXERCISES IN RETAIL MANAGEMENT MAIN MENU

Text Page

Reference

PART 2: SITUATION ANALYSIS

1. Franchising 98

2. Direct Marketing 136

PART 3: TARGETING CUSTOMERS AND GATHERING

INFORMATION

3. Attitudinal Survey 213

PART 4: STORE LOCATION

4. Reilly’s Law 237

5. Trading Area Saturation 247

PART 5: MANAGING A RETAIL BUSINESS

6. Key Business Ratios 310

7. Budgeting and Cash Flow 314

PART 6: MERCHANDISING PLANNING AND PRICING

8. Retail Method of Accounting 402

9. Open-to-Buy 411

PART 8: PUTTING IT ALL TOGETHER

10. Sales Opportunity Grid 516

HOW TO PRINT FROM THE EXERCISE DISKETTE

While using the exercises, the student may print any screen for his/her own reference or for the submission of a class assignment. The student simply turns on the printer Then he/she simultaneously points and clicks at the Print Screen box that appears at the bottom of each exercise screen. The screen appearing on the computer monitor will then automatically be printed--including the student's name, class, and section. Questions for each exercise can be printed by clicking the Print Screen box.

TROUBLESHOOTING DIRECTIONS-- FOR EXCEL SOFTWARE FOR PC

The macros function must be set to "Enable All Macros" in EXCEL for the Menu, Reset Name/Class, Instructions, Print Screen, Questions, Next and Exit options to properly function. To enable all macros, open the EXCEL program, and then press the "Office Button" at the top left hand corner of your screen. Select the "Excel Options," and then click on the "Trust Center" option. Select "Trust Center Settings," and then select "Macro Settings." Select the "Enable All Macros" option and then click "OK." Close EXCEL and then open Computer Based Exercises. The macros at the bottom of the page will now properly function.

This operation must only be performed the first time this program is used.

TROUBLESHOOTING DIRECTIONS-- FOR EXCEL SOFTWARE FOR MACs

Evert time this program is accessed on the MAC, you will get the following statement: This workbook contains macros. Do you want to disable macros before opening this file? Choose the "Enable Macros" option each time you open this file.

PLACING STUDENT NAMES YOUR NAME AND CLASS SECTION ON EACH PRINTOUT

You should make sure that each student places his/her name, class, and section on his/ her disk using the Reset Name/Class option that is available when opening this program and on the Main Menu screen. This information will then be contained on each output screen. The listing of name, class, and section on the disk prevents students from submitting assignments done by others.

THE EXERCISES

In the following sections, each exercise is answered. For every exercise, we also present objectives, a list of the relevant key terms and concepts from the text, an explanation of the exercise, and questions/assignments to be answered or completed.

PART 2: SITUATION ANALYSIS (EXERCISES 1-2)

EXERCISE 1: FRANCHISING

Objectives

1. To review the factors that a prospective franchisee considers when choosing which franchised outlet to operate

2. To weigh the relative merits of operating a franchise versus independent ownership of a retail business

3. To consider that different types of franchises have different profit margins and operating costs

4. To determine a franchise's profitability under different sales levels

5. To analyze how costs change with sales revenues

Key Terms and Concepts

independent product/trademark franchising

franchising business format franchising

constrained decision making

Explanation of Exercise

As a prospective franchisee, the student is considering the purchase of one of several franchised outlets: fast food (F), used computer (U), and an ice cream shoppe (I). After choosing the type of franchise by clicking the appropriate letter (F, U, or I,), this exercise allows the student to vary sales levels and other factors, and determine their effect on the franchise's performance. Each type of franchise has different default values for each factor.

The mouse or trackball are used to choose the factor to change. After the chosen factor is highlighted, the screen prompts for an acceptable value:

Factor Range of Acceptable Values

Sales $500,000-$3,000,000

Cost of Goods Sold 15%-75% of sales

Salaries $100,000-$500,000 (includes franchisee’s salary)

Royalty Expense 0%-8% of sales

Utilities $10,000-$300,000

Accounting and Legal Services $10,000-$100,000

Ongoing Advertising Fee 0%-4%

Loan $100,000-$1,500,000 (interest is at 12 %)

Insurance $10,000-$200,000

Investment $50,000-$1,000,000

Yearly Hours Worked 1,000-3,000

Sales can be changed in selected $10,000 increments by clicking on the left and right arrow keys. The adjustment increments for the other factors are as follows: cost of goods sold: 1 percent, salaries $20,000, royalty expense 1 of 1 percent, utilities $2,000, accounting and legal expenses $1,000, ongoing advertising fee of 1 percent, loan $10,000; insurance $2,000; investment $10,000, and yearly hours worked 50 hours. The exercise automatically computes gross profit, total operating expenses, net profit before tax, return on investment, and profit per hour.

The exercise is keyed to pages 98-101 in the text.

Questions/Assignments

1. Compare the financial characteristics of each type of franchising (fast food, used computer and ice cream shoppe) using the default values in this exercise.

Comparative Profit-and-Loss Statements

Fast food Used Computer Ice Cream

Franchise Franchise Shoppe Franch.

Sales $ 1,500,000 $ 700,000 $ 500,000

Cost of goods 525,000 280,000 150,000

Gross profit $ 975,000 $ 420,000 350,000

Less operating expenses:

Salaries $ 300,000 $ 250,000 $ 140,000

Royalty expense 60,000 14,000 35,000

Utilities 110,000 12,000 17,000

Accounting and legal 45,000 11,000 12,000

Ongoing advtg. fee 60,000 14,000 10,000

Interest cost 144,000 26,400 25,200

Insurance 160,000 32,000 24,000

Total oper.exp. 879,000 359,400 263,200

Net profit before tax 96,000 60,600 86,800

Return on investment 13.71% 33.66% 72.33%

Profit per hour $ 32.00 $ 30.30 $ 37.74

Total investment $ 700,000 $ 180,000 $ 120,000

Ongoing advtg. fee 4.0% 2.0% 2.5%

Total hours 3,000 2,000 2,300

Gross profit as % of sales 65.0 60.0 70.0

Oper. exp. as % of sales 58.6 51.3 47.2

Net profit as % of sales 6.4 8.7 17.4

The above figure compares the profit-and-loss statement for each type of franchise. Gross profit as a percent of sales, net profit as a percent of sales, and return on investment, and profit per hour are highest for the ice cream shoppe.

2. Compute the profitability of a franchised ice cream shoppe with the following factor inputs: sales = $700,000, cost of goods sold = 20%, salaries = $200,000, royalty expense = 8% of sales, utilities = $30,000, accounting and legal services = $30,000, ongoing advertising fee = 4% of sales, loan = $400,000, insurance = $24,000, investment = $150,000, and yearly hours worked = 2,000. How would relative profitability change if sales were increased to $1,000,000? Explain your answer.

At the $700,000 sales level the ice cream shoppe would have a gross profit of $560,000, total operating expenses of $416,000, a net profit before tax of $144,000, a return on investment of 96.00%, and a profit per hour in addition to salary of $72.00.

At the $1,000,000 sales level the ice cream shoppe would have a gross profit of $800,000, total operating expenses of $452,000, a net profit before tax of $348,000, a return on investment of 232.0%, and a profit per hour in addition to salary of $174.00.

3. An independent ice cream store that has been established for twenty years can be purchased for $300,000 (with one-third down and two-thirds via a loan at 12 percent annual interest). This store is similar to the one in question 2 in every regard (but with $600,000 in annual sales), except that there are no royalty and advertising fees. Instead of a royalty fee, you would have to pay monthly rent of $7,500. Use the computer program and your own calculations to determine the profitability of buying the independent store. Contrast the results with the franchised outlet in question 2 having $700,000 in sales. Which store would you select? Why?

Comparative Profit-and-Loss Statements

Ice Cream Ice Cream

Franchise Independent

Sales $ 700,000 $ 600,000

Cost of goods 140,000 120,000

Gross profit $ 560,000 $ 480,000

Less operating expenses:

Salaries $ 200,000 $ 200,000

Royalty expense 56,000 --

Rent -- 90,000

Utilities 30,000 30,000

Accounting and legal 30,000 30,000

Ongoing advtg. fee 28,000 --

Interest cost 48,000 24,000

Insurance 24,000 24,000

Total oper.exp. $ 416,000 $ 398,000

Net profit before tax $ 144,000 $ 82,000

Return on investment 96.0% 82.0%

Profit per hour $ 72.00 $ 41.00

Gross profit as % of sales 80.0 80.0

Oper. exp. as % of sales 59.4 66.3

Net profit as % of sales 20.5 13.6

The ice cream franchise shows much higher profitability due to larger sales as well as lower operating expenses as a percentage of sales.

In addition, the actual additional profitability of the independent may be somewhat overstated:

16. There was no advertising allowance budgeted for the independent store in this example.

17. It is probable that a franchised ice cream shoppe would have higher sales than a comparable independent shop at the same location.

18. The number of hours worked per year may be lower at the franchised shop due to centralized controls, standardized operating procedures, and franchisor assistance.

• The franchised shoppe could have a lower cost of capital due to preferential arrangements with leading lendors.

19. Accounting and legal services could be less for the franchised unit due to the use of a standardized accounting system.

An excellent answer should reflect these points.

4. In deciding what retail business to purchase, what other factors would you consider besides those noted in the exercise? Explain your answer.

The student should examine his or her personal abilities, financial resources, the time demands of each business, the competitive environment of each business, the costs of purchasing a business versus establishing a business from scratch, whether an existing owner will stay on during a transition period (to train the new owner and to introduce the new owner to customers and vendors), the freshness of inventory, a franchisee's overall success rate, a franchisee's training program quality, the quality of a franchisee's overall assistance, and so on.

EXERCISE 2: DIRECT MARKETING

Objectives

1. To evaluate the use of the Web by an independent retailer

1. To study the different types of costs associated with developing and maintaining a web site

2. To determine the association between site development and maintenance and sales revenues

Key Terms and Concepts

direct marketing World Wide Web (Web)

Internet

Explanation of Exercise

As the proprietor of ABC PHOTO, an independent camera shop, the student can vary two important budget components relating to the firm’s Web site: initial site development costs and annual site maintenance and upgrading costs. The proprietor seeks to maximize profits from overall Web sales.

The mouse or trackball can be to select the marketing variable (planned sales, level of initial site development costs, and annual maintenance and upgrading costs to be changed. The planned sales can vary in $10,000 increments between $100,000 to $1,000,000 by clicking on the left and right arrow keys. There are three levels (low, medium, and high) for both initial site development and annual site maintenance and upgrading costs. The computer automatically calculates savings in direct mail expenses and the planned profit from the Web sales.

These are the default values for each level of expense:

Initial Site Development (A One-Time Cost)

Level Cost Features

Low: $ 8,000 Low-level graphics

Medium: $12,000 Medium-level graphics + E-mail capability

High: $20,000 High-level graphics+ E-mail capability+ auto order tally + automatic order confirmation

Annual Site Maintenance and Upgrading (Annual Cost Including First Year)

Level Cost Features

Low: $ 4,000 Update prices and product availability

Medium: $ 8,000 Low level + replace server every two years

High: $10,000 Medium level + upgrade graphics + add sound

This exercise assumes that the Web-based sales will have a 20 percent profit margin. In addition, web-based sales will reduce direct mail expenses (by 2 percent of total web-related sales).

The exercise is keyed to pages 136-143 in the text.

Questions/Assignments

1. Calculate the planned profit from Web sales based on $780,000 in additional sales over a five year period if the firm has high initial site development costs and high annual and upgrading costs.

Planned Sales Level $780,000

Less: Cost of Goods Sold (80 percent of sales) 624,000

Equals: Gross Profit 156,000

Less: Initial Site Development Costs $20,000

Less: Annual Maint. And Upgrading Costs 50,000

Plus: Savings in Direct Mail Expenses 15,600

Equals: Planned Additional Costs 54,400

Equals: Planned Profit from Web Sales $ 101,600

2. Calculate the planned profit from Web sales based on $500,000 in additional sales over a five-year period if the firm has high initial site development costs and high annual and upgrading costs.

Planned Sales Level $500,000

Less: Cost of Goods Sold (80 percent of sales) 400,000

Equals: Gross Profit 100,000

Less: Initial Site Development Costs $20,000

Less: Annual Maint. And Upgrading Costs 50,000

Plus: Savings in Direct mail Expenses 10,000

Equals: Planned Additional Costs 60,000

Equals: Planned Profit from Web Sales $ 40,000

3. Discuss the advantages of ABC Photo’s maintaining a site on the Web.

Among the advantages of ABC Photo’s maintaining a site on the Web are:

20. Access to an additional base of consumers (including international customers)

Ability to provide information to prospects

22. Access to time-pressed shoppers 24 hours per day, 365 days per week

23. Furnishing customer service in terms of hot links to vendor sites

24. Ability to use multimedia in sales presentations

25. Inability of customers to differentiate between a small and a large retailer based on web site

26. Ability to communicate with customers via E-mail

4. Discuss the disadvantages of ABC Photo’s maintaining a site on the Web.

Among the disadvantages of ABC Photo’s having a site on the Web are:

27. The need to constantly update web site data in terms of product availability, prices, and hot link addresses

The need to communicate ABC’s web site address to prospects

29. Concern among many web site shoppers with credit card security

30. Inability of the web to reach consumers who do not have access to a computer with a modem and an access provider.

31. Uneven demographics and life-styles (upscale, male, and computer literate) which may not match that of ABC’s target market.

32. Ready access to discounters on the web may promote price competition for ABC.

PART 3: TARGETING CUSTOMERS AND GATHERING INFORMATION (EXERCISE 3)

EXERCISE 3: ATTITUDINAL SURVEY

Objectives

1. To illustrate the use of marketing research via a consumer attitude study on customer service of a department store near to your college

2. To encourage students to actually collect attitude data

3. To engage in tabulation and cross-tabulation of retailing survey data

4. To develop recommendations based on attitude survey data

Key Terms and Concepts

survey disguised survey

nondisguised survey

Explanation of Exercise

As research director of a major department store chain, the student has been asked to conduct a survey of consumer attitudes towards his/her firm. This exercise lets the student enter data based on interviews; the computer program generates overall respondent percentage tabulations, an overall average rating by question, and cross-tabulations (by percentages and averages) for each demographic group.

A blank copy of the survey form can be printed by either clicking on the Survey Print button of the first page of this exercise. Because this exercise can store and analyze data on up to 50 respondents at a time, the student can either hand out surveys to respondents (by printing one copy and then photocopying additional ones) and enter the answers into the computer all at once, or have respondents answer directly on the computer screen. The student can enter data at different times or at one time. The mouse or trackball can be used to select Yes to continue with the current survey or No to erase the data and start a new survey. If the student chooses No, all the data from past surveys will be erased.

The survey consists of 10 attitude and 4 demographic questions. The mouse or trackball are used to choose the question to be rated, which is then highlighted.. Ratings can be made through selecting the appropriate response via the arrow keys. After entering a set of responses (ending with question 14), clicking on the [Save, Input Another Survey ] will enable the researcher to enter another set of responses. Clicking on the [Analyze, After Save] button will save the responses and take the student to the analysis portion. If the student chooses [Analyze, After Save], he/she should select the [Update Results] button to update the data analysis.

The questionnaire enables the student to evaluate all respondents or respondents with selected demographic attributes. Ratings on attitude questions can range from +2 (Strongly Agree) to -2 (Strongly Disagree); the neutral rating is 0. As just noted, up to 50 surveys can be stored on the disk, which cannot be write-protected when implementing the save function for this exercise.

Checking all of the demographic questions will summarize all respondents. Students can select or deselect specific demographic categories to see their impact.

The exercise is keyed to page 213 in the text.

Questions/Assignments

1. Collect data from respondents relating to their attitudes toward a nearby major department store. Evaluate the survey results using the total number of respondents and for major demographic groupings.

Students can complete this assignment individually or in teams. If you have a large section, you may want to assign a portion of the class to each of two to five different department stores. This would also make class discussion more lively because the students could compare consumer attitudes toward the various stores.

2. Combine your results with three other classmates and perform an overall analysis of the store's customer service strategy. How do the results compare with those you gathered individually? Why?

The students should (1) compute summary results by question, (2) analyze the demo- graphics of the respondents (as shown in Table 1 on the exercise screen), (3) analyze the overall responses to each question in the survey (as shown in Table 2 on the exercise screen), and (4) analyze the data in terms of both demographics and answers to questions (as shown in Table 2 on the exercise screen).

3. Evaluate the questionnaire form.

The questionnaire is quite straightforward. It asks questions about attitudes in a nondisguised manner. All questions are close-ended and easy to answer. The survey should take no more than a few minutes to complete.

There are no probing questions. Respondents are not asked whether they shop at the store, how often they shop, what they typically buy there, how much they spend on a typical shopping trip, how the store rates in comparison to other stores, etc.

4. Develop a similar attitudinal questionnaire using a semantic differential. Contrast the questionnaire to the one in this exercise.

A semantic differential is a survey technique that asks respondents to react to a series of bipolar adjectives. With the technique, the respondent is asked to rate one or more retailers on several criteria. Each criterion is evaluated along a bi-polar adjective scale such as unfriendly-friendly, untidy-neat, high quality merchandise- low quality merchandise. By computing the average rating of all respondents for each criterion, an overall store profile can be developed. Likewise a semantic differential can be developed for major competitors. Students can compare the mid-points for each store.

PART 4: STORE LOCATION (EXERCISES 4-5)

EXERCISE 4: REILLY'S LAW OF RETAIL GRAVITATION

Objectives

1. To have the student better understand the formula for Reilly's law

2. To demonstrate the impact of both the mileage between two cities (towns) and the population of each city on trading-area size

3. To discuss the limitations of Reilly's law

Key Terms and Concepts

Reilly's law of retail point of indifference

gravitation

Explanation of Exercise

As real-estate director for a specialty store chain, the student is to use Reilly's law to compute the point of indifference (based on the distance in miles between cities A and B, the population of city A, and the population of city B). The computer program automatically computes and graphs the point of indifference on the basis of the data supplied. The calculation is shown on the computer screen.

The mouse or trackball can be used to choose the value to change by clicking on the left and right arrow keys. The student can change the distance in miles between cities A and B from 1 to 30 miles, the population of city A from 10,000 to 100,000, and the population of city B from 10,000 to 100,000 in increments of 1 mile and 1,000 people.

The exercise is keyed to pages 237-238 in the text.

Questions/Assignments

1. What are the major assumptions of Reilly's law? How realistic are these assumptions? Explain your answer.

The aim of Reilly's law of retail gravitation is to determine a point of indifference between two cities or communities, so the trading area of each can be determined. The point of indifference is the geographic breaking point between two cities/communities at which consumers would be indifferent to shopping at either. Reilly's law rests on these assumptions: (1) two competing areas will be equally accessible from the major road; and (2) retailers in the two areas will be equally effective. Other factors (such as the dispersion of the population) are held constant or ignored. According to Reilly's law, more consumers will be attracted to a larger city because a greater amount of store facilities will exist, making the increased travel time worthwhile.

The law of retail gravitation is an important contribution to trading-area analysis because of its ease of calculation and the research that has been conducted on it. Despite its usefulness, Reilly's law does have at least two key limitations. First, distance measurement is confined to major thoroughfares and does not involve cross streets; yet many people will travel shorter distances along slower cross streets. A better measure might be travel time. Second, actual distance to a store may not correspond with consumer perceptions of distance. A store offering few customer services and crowded aisles is likely to be a greater perceived distance from the customer than a similarly located store with a more pleasant shopping environment.

2. What type of retail areas best fit the assumptions of Reilly's law? Why?

The areas best fitting Reilly's law are those along major thoroughfares and those where the extent of the retail facilities bear some relation to the size of the population. In general rural areas best fit the assumptions of Reilly's law.

3. Compute the points of indifference between city A and B for the following distances and population sizes:

a. Distance equals 15 miles, city A has 10,000 people, and city B has 100,000 people. People will travel 3.6 miles to city A.

b. Distance equals 15 miles, city A has 25,000 people, and city B has 100,000 people. People will travel 5.0 miles to city A.

c. Distance equals 15 miles, city A has 50,000 people, and city B has 100,000 people. People will travel 6.2 miles to city A.

d. Distance equals 15 miles, city A has 75,000 people, and city B has 100,000 people. People will travel 7.0 miles to city A.

As the population size of A and B become more similar, the breaking point in terms of how far people will travel to each city becomes more equal.

4. How could a small city overcome its size and increase its trading area? Is this possibility covered by Reilly's law? Explain your answer.

A small city could become known for its especially low prices (by having many discounters), its outstanding customer service (by having several upscale stores), or its product assortment in a particular category (by having several retailers in the same product category), or by having especially effective retailers (category killers, discounters, or retailers with legendary customer service levels).

This possibility is not really covered by Reilly's law, because prices, service, and specialization are not taken into consideration.

EXERCISE 5: TRADING-AREA SATURATION

Objectives

1. To consider the relevance retail saturation measures for retailers

2. To have the student better understand the computation of a trading area's saturation

3. To look at the differences among understored, saturated and overstored retail areas

Key Terms and Concepts

understored area saturated area

overstored area

Explanation of Exercise

Your student, as a retailing consultant, has been asked to assess the degree of retail saturation in a specific geographic area on the basis of multiple measures of retail saturation. In this exercise, you can vary an area's population, total supermarket sales, and total number of supermarkets. The computer program then automatically computes three measures of retail saturation: average persons per supermarket, average sales per supermarket, and average sales per capita and the area's degree of saturation. Calculations assume that the average supermarket is 30,000 square feet and has 60 employees.

The mouse or trackball can be used to select the value to change by clicking on the left and right arrow keys. The new amounts can then be entered via the mouse or trackball. Students can vary the total population in an area from 50,000 to 500,000; total supermarket sales (in 000) from $100,000 to $400,000; and the total number of supermarkets from 5 to 40. The total population can be changed in increments of 1,000, total supermarket sales in increments of $1 million, and total number of supermarkets can be changed in increments of 1 unit.

The exercise is keyed to pages 247-248 in the text.

Questions/Assignments

1. Why is trading-area saturation a useful concept for supermarkets?

Many trading-area saturation studies have been conducted on supermarkets since there are fewer regional differences regarding supermarket purchases than for other types of retailers. Secondly, reliable data exists with regard to supermarket sales, and the number of supermarkets. This data is updated yearly. Data availability allows researchers to develop and update norms for the degree of saturation.

2. How could you use the three measures of trading-area saturation in this exercise to determine whether an area is understored, overstored, or saturated?

A location that is understored on the basis of the three ratios in this exercise is probably understored. However, as with all ratios, care must be taken to analyze each of the ratios. For example, one area may have newer (and probably larger supermarkets) than another. The mix of stores that are considered supermarkets (for example, traditional supermarkets and superstores) may also vary on an area-to-area basis.

3. Compute the trading-area saturation measures for the following three different sets of data for total population, total supermarket sales, and total number of supermarkets. Explain how the answers differ.

Total Supermarket Total Number

Total Population Sales of Supermarkets

100,000 $200,000,000 10

150,000 $200,000,000 10

200,000 $200,000,000 10

(a) Total population = 100,000, total supermarket sales (000) = $200,000, and total number of supermarkets = 10; average number of persons per supermarket = 10,000 (UNDERSTORED), average sales per supermarket (000) = $20,000 (UNDERSTORED), and average sales per capita = $2,000 (UNDERSTORED).

(b) Total population = 150,000, total supermarket sales (000) = $200,000, and total number of supermarkets = 10; average number of persons per supermarket = 15,000 (UNDERSTORED), average sales per supermarket (000) = $20,000 (UNDERSTORED), and average sales per capita = $1,333 (UNDERSTORED).

(c) Total population = 200,000, total supermarket sales (000) = $200,000, and total number of supermarkets = 10; average number of persons per supermarket = 20,000 (UNDERSTORED), average sales per supermarket (000) = $20,000 (UNDERSTORED), and average sales per capita = $1,000 (SATURATED).

These calculations show the impact of increasing population in increments of 50,000 people. Note that while the average number of persons per supermarket increased from 10,000 to 20,000 and average sales per capita declined from $2,000 to $1,000; the average sales per supermarket did not change. Also changes in the first two examples (a) and (b) did not affect the degree of store saturation.

4. Should a prospective supermarket use trading-area saturation data differently than an existing one? Explain your answer.

A prospective supermarket must be sure to include its proposed supermarket (in terms of both the additional location as well as the additional square footage) in computing the ratios. For example, if the proposed store is not included it may artificially increase the number of persons per supermarket, and the average sales per supermarket ratios.

PART 5: MANAGING A RETAIL BUSINESS (EXERCISES 6-7)

EXERCISE 6: KEY BUSINESS RATIOS

Objectives

1. To study five key business ratios: quick ratio, current ratio, collection period, assets to net sales ratio, and accounts payable to net sales

2. To demonstrate how changes in sales, assets, and liabilities affect each key business ratio

3. To contrast a profit-and-loss statement and a balance sheet

Key Terms and Concepts

quick ratio collection period

current ratio assets to net sales

accounts payable to sales

Explanation of Exercise

As the owner of Donna's Gift Shop, the student is very concerned the firm's financial position. Net sales and selected items from the firm's balance sheet are presented in this exercise. The decisions he/she can make as to the sales levels and the amount of selected assets and liabilities affect the firm's financial position. Some values in this exercise (total current assets, total current liabilities, total liabilities, and net worth) are calculated by the computer.

The mouse or trackball are used to choose enter the value to change by clicking on the left and right arrow keys. New amounts within acceptable ranges can be entered for each highlighted factor. You can vary net sales from $100,000 to $300,000, cash on hand from $10,000 to $20,000, inventory from $15,000 to $40,000, accounts receivable from $0 to $15,000, payroll expense payable from $0 to $15,000, taxes payable from $0 to $15,000, accounts payable from $5,000 to $40,000, and short-term loans from $0 to $20,000. All inputs be varied in increments of $1,000.

The exercise is keyed to pages 310-311 in the text.

Questions/Assignments

1. Determine the key business ratios under three different scenarios regarding sales, accounts receivable, and payroll expenses payable.

Net Sales Accounts Receivable Payroll Expenses Payable

$150,000 $ 5,000 $ 5,000

$200,000 $10,000 $10,000

$300,000 $15,000 $15,000

Use the following default values for cash on hand: $15,000; inventory: $25,000; taxes payable: $10,000; accounts payable: $25,000; and short-term loan: $4,000. Explain your assumptions and the resulting ratios.

(a) Scenario (1)--Net sales = $150,000, accounts receivable = $5,000; and payroll expenses payable = $5,000.

Quick ratio = 0.45 POOR

Current ratio =1.02 POOR

Collection period = 12.17 EXCELLENT

Assets to net sales = 1.63 EXCELLENT

Accounts Payable to sales = 0.17 SATISFACTORY

(b) Scenario (2)--Net sales = $200,000, accounts receivable = $10,000; and payroll expenses payable = $10,000.

Quick ratio = 0.51 POOR

Current ratio =1.02 POOR

Collection period = 18.25 EXCELLENT

Assets to net sales = 1.25 SATISFACTORY

Accounts Payable to sales = 0.13 POOR

(c) Scenario (3)--Net sales = $300,000, accounts receivable = $15,000; and payroll expenses payable = $15,000.

Quick ratio = 0.56 POOR

Current ratio =1.02 POOR

Collection period = 18.25 EXCELLENT

Assets to net sales = 0.85 POOR

Accounts Payable to sales = 0.08 POOR

The student's evaluation needs to reflect the range of data input into the computer exercise. In this example, the range of input data had little impact on all of the ratios (in terms of the preset performance criteria set forth in Table 1 of this exercise).

2. What are the pros and cons of a high quick ratio and a high current ratio?

Pros of a high quick and current ratio are the high ability to pay debts, an excellent credit rating (which may facilitate expansion), and a high ability to ride-out recessions and periods of high competition.

Cons of a high quick ratio and a high current ratio are poor utilization of assets. This may be reflected in lower return on net worth.

3. How does a balance sheet differ from a profit-and-loss statement?

While a balance sheet reflects a retailer's assets, liabilities, and net worth a profit-and-loss statement reflects the retailer's revenues and expenses. The computation of some performance measures such as return on net worth or GMROI requires input from both statements.

4. Are the assumptions used in this exercise realistic? Explain your answer.

The assumptions in this exercise are realistic. The values input into the profit-and-loss statement are controllable by the student and represent a wide range of performance. The performance criteria are also realistic. An excellent response should indicate that different retailers have different norms and that an excellent assets to net sales ratio for one type of retailer (a jewelry store for example) would indicate poor performance for another type (such as a supermarket).

EXERCISE 7: BUDGETING AND CASH FLOW MANAGEMENT

1. To study the amount and timing of revenues received versus the amount and timing of expenditures during a specific time period

2. To show the impact of changes in monthly sales on cash flow

3. To demonstrate the difference between a profit-and-loss statement and cash flow analysis

Key Terms and Concepts

budgeting incremental budgeting

zero-based budgeting cash flow

Explanation of Exercise

As the operations manager for an independent retailer, the student is very involved with budgeting and cash flow management. Monthly profit-and-loss and cash flow statements for the months of January, February, and March are presented in this exercise. The decisions the student makes as to the sales levels in each of these months affect the firm's cash flow; all other values in this exercise are calculated by the computer.

A mouse or trackball is used to enter values by clicking on the up and down arrow keys. Monthly sales go from $25,000 to $160,000. Sales can be entered in $1,000 increments by typing an amount and pressing the return key.

These assumptions are made in cash flow projections: (1) The owner has an $10,000 bonus in January. (2) The cost of goods sold is 53 percent of sales. (3) Because some sales are on credit, one-half of net sales in a month are from the prior month's transactions and one-half are from transactions in the current month. (4) December sales were $165,000. (5) The cost of goods sold is paid in the following month. (6) Operating expenses (such as salaries and rent) are paid in the month incurred. (7) Interest on loans is due the month following the loan. (8) Interest is paid at the annual rate of 11 percent when cumulative cash flow is negative. Interest is earned at an annual rate of 5 percent when cumulative cash flow is positive. (Note: this translates to an interest rate of .05/12 or 0.0042 percent per year.)

The exercise is keyed to pages 314-318 in the text.

Questions/Assignments

1. Differentiate between a profit-and-loss statement and cash flow analysis. Explain what happens to profits and cash flow when monthly sales are $50,000, $100,000, and $150,000.

A profit-and-loss statement reports all revenues and costs during the period in which they are recorded or assigned. Thus, revenues are recorded when sales transactions are made and costs are recorded directly as those transactions are made (e.g., cost of goods sold, sales commissions) or prorated by period (e.g., fixed costs). Payment does not have to be actually received or made for revenues and costs to be noted on a profit-and-loss statement. When planning and implementing a budget, a retailer must carefully consider cash flow, which relates the amount and timing of the revenues received to the amount and timing of expenditures made during a specific time period. In cash flow management, the retailer's intention is usually to make sure revenues are received prior to expenditures' being made. Otherwise, short-term loans may have to be taken out or profits tied up in the business.

If monthly sales are $50,000, the retailer has a quarterly loss of $24,330. Its cash flow is negative for January, but positive for February and March. The cumulative net cash flow is negative for the entire three month period, -$3,780. If monthly sales are $100,000, the retailer has a quarterly profit of $46,170. Its cash flow is positive in every month, and cumulatively it is $68,220. If monthly sales are $150,000, the retailer has a quarterly profit of $116,670. Its cash flow is positive in every month, and cumulatively it is $140,220

2. At a sales level of $125,000 for each month, compare the cash flows for January, February, and March. Discuss why the differences occur.

Cash Flow and Loan Status (in 000s)

January February March

1/2 Previous Month Sales $ 82.50 $ 62.50 $ 62.50

1/2 Current Month Sales $ 62.50 $ 62.50 $ 62.50

Interest Received on Deposits $ 0.00 $ 0.07 $ 0.10

TOTAL CASH INFLOW $145.00 $125.07 $125.10

Cost of Goods Sold $ 87.45 $66.25 $ 66.25

Operating Expenses $ 18.00 $16.00 $ 17.00

Depreciation $ 0.00 $ 0.00 $ 0.00

Loan Interest Paid $ 0.00 $ 0.00 $ 0.00

Other Costs $ 4.50 $ 2.00 $ 3.50

Owner Bonus $ 10.00 $ 0.00 $ 0.00

TOTAL CASH OUTFLOW $119.95 $84.25 $ 86.75

Net Monthly Cash Flow $ 25.05 $ 40.82 $ 38.35

Loan Payoff $ 0.00 $ 0.00 $ 0.00

Cumulative Net Cash Flow $ 25.05 $ 65.87 $104.22

Current Loan Outstanding $ 0.00 $ 0.00 $ 0.00

During January, revenues are partially based on the high sales made in December; likewise, the cost of goods sold represents the merchandise sold in December. Operating expenses and other costs are fixed. The owner takes a large cash bonus. In February, the cost of goods sold are more closely aligned with that month's actual revenues. Operating expenses and other costs are fixed. The positive cash flow is also due in part to the absence of an owner bonus. March continues the performance of February. Operating expenses and other costs are fixed.

3. How can the retailer in this exercise improve its cash flow? Be specific.

A retailer can improve it cash flow by raising its ratio of cash to credit sales, getting extended payment terms for purchases, lowering the interest paid on loans, spreading out the owner bonus over several months, converting some operating costs from fixed to variable, keeping a cash surplus on hand to avoid loans, and increasing sales volume.

4. Are the assumptions used in this exercise realistic? Explain your answer.

Most of the assumptions are quite realistic: Cash flow varies by month (even if sales remain constant). Cash flow and profitability are distinct concepts. Short-term loans may be necessary (even if a firm is quite profitable over the year). Many revenues and expenses are received and paid out over time, not as transactions are completed. Owners do take cash out of their businesses.

PART 6: MERCHANDISE PLANNING AND PRICING (EXERCISES 8-9)

EXERCISE 8: THE RETAIL METHOD OF ACCOUNTING

Objectives

1. To illustrate the retail method of accounting and the cost complement

2. To show the impact of changes in net purchases (at cost), additional markup, trans- portation charges, sales, markdowns, employee discounts, and stock shortages on the computation of the ending retail book value of inventory

3. To demonstrate how the adjusted book value of inventory is determined

4. To consider the complexity of the retail method

Key Terms and Concepts

retail method of accounting stock shortages and overages

cost complement adjusted book value of inventory

deductions from retail value ending inventory value

Explanation of Exercise

As a retail buyer for Quality Furniture store, the student is to recognize that calculating the cost complement and ending inventory value are important aspects of the retail method of accounting. There are three steps in the process: (1) calculating the cost complement; (2) calculating deductions from the retail value; and (3) converting retail value to cost. This exercise allows the student to vary net purchases (at cost), additional markup, transportation charges, sales, markdowns, employee discounts, and stock shortages and see their effect on ending inventory value. The computer program automatically computes the cost complement and inventory value.

The mouse or trackball are used to choose the value to change by clicking on the left and right arrow keys. New amounts can then be entered. The student can vary net purchases (at cost) from $25,000 to $75,000 (in $500 increments); additional markup from $0 to $7,500 (in $5 increments); transportation charges from $500 to $4,000 (in $5 increments); quarterly sales from $40,000 to $130,000 (in $500 increments); markdowns from $1,000 to $6,000 (in $5 increments); employee discounts from $1,000 to $3,000 (in $5 increments); and stock shortages from 1 percent to 5 percent of sales (in increments of 1/10 of 1 percent).

The exercise is keyed to pages 402-405 in the text.

Questions/Assignments

1. Find the cost complement for four different sets of data for beginning inventory (at cost and at retail), net purchases (at cost and at retail), additional markup, and transportation charges. Explain your answers.

The student should quickly determine that beginning inventory is preset and cannot be varied. The relationship between net purchases at cost and at retail is also preset.

The cost complement is at its lowest level (.64) when additional markup is $7,500 (the highest amount allowed), and transportation charges are $500 (the lowest amount allowed). The cost complement is at its highest level (.71) additional markup is $0 (the lowest amount allowed), and transportation charges are $4,000 (the highest amount allowed). All other combinations will yield cost complements that fall between these two levels.

2. Calculate the ending book value at cost for four different sets of data for net purchases, additional markup, transportation charges, sales, markdowns, employee discounts, and stock shortages. Why do your answers differ?

The ending value of inventory will be higher when: net purchases are high, additional markup is high, transportation charges are high, quarterly sales are low, markdowns are low, employee discounts are low, and stock shortages are low. Likewise, the end- ing value of inventory will be lower when: net purchases are low, additional markup is low, transportation charges are low, quarterly sales are high, markdowns are high, employee discounts are high, and stock shortages are high.

3. Explain how stock shortages are computed using the retail method of accounting. What are the pros and cons of this procedure?

While sales, markdowns, and employee discounts can be recorded throughout an accounting period, a physical inventory is necessary to compute stock shortages. Once a physical inventory is taken, stock shortages are simple to compute under the retail method. A firm would just compare the retail book value of ending inventory with the actual physical ending inventory value at retail. If a book inventory figure exceeds a physical ending inventory amount, a stock shortage exists. Then, the book value is adjusted accordingly.

The retail method helps place a fair value on the cost of stock shortages for a given period. However, because a retailer must undertake a physical inventory to compute stock shortages, and a physical inventory is taken only once or twice a year, short- ages are often estimated for monthly merchandise budgets.

4. What is the reason for calculating the ending book value at cost in the computation of the open-to-buy figure?

In almost all cases, retailers' annual and quarterly open-to-buy figures are tied to the firms' sales forecasts for those periods. These retailers would then deduct the ending book value of inventory at cost from the open-to-buy at cost (which is derived by multiplying the sales forecast by the cost complement). This results in the actual open-to-buy at cost for the specified time period.

EXERCISE 9: OPEN-TO-BUY

Objectives

1. To demonstrate how open-to-buy is computed

2. To show the effects of planned sales, planned reductions, planned end-of-month stock, and planned beginning-of-month stock on planned purchases

3. To study the difference between planned purchases and open-to-buy at retail

4. To illustrate the conversion of open-to-buy at retail to open-to-buy at cost using the cost complement

Key Terms and Concepts

planned purchases at retail open-to-buy at retail

planned purchases at cost open-to-buy at cost

Explanation of Exercise

As a retail buyer for an apparel store chain, the student needs to continuously update information on planned sales, planned reductions, planned end-of-month stock, and purchase commitments to determine the open-to-buy position. This computer program uses a cost complement of .65 in converting open-to-buy at retail to open-to-buy at cost.

The value to be changed is chosen by using the mouse or trackball by clicking on the left and right arrow keys. Acceptable inputs are: planned sales, from $15,000 to $50,000; planned reductions, from $0 to $5,500; planned end-of-month stock, from $12,000 to $55,000; and purchase commitments, from $7,000 to $22,000. The cost complement is fixed at 0.65. The computer will warn the student if purchase commitments exceed the planned purchases. Each input can be entered in increments of $500, except purchase commitments which can be entered in $100 increments.

The exercise is keyed to pages 411-412 in the text.

Questions/Assignments

1. Determine the open-to-buy at cost for four different sets of data for planned sales, planned reductions, end-of-month stock, and purchase commitments. Discuss the differences in your answers. What is the significance of each answer for a store merchandise manager?

Here is what happens to open-to-buy when different data are entered:

33. When planned sales go up, open-to-buy goes up.

34. When planned reductions go up, open-to-buy goes up.

35. When end-of-month stock goes up, open-to-buy goes up for the given month--but declines for the following month (because the beginning inventory in the next month rises).

36. When purchase commitments go up, open-to-buy goes down.

This means that open-to-buy in a particular month will be higher if the retailer expects a good sales year, if it expects a lot of stock shortages, if it likes to have a lot of merchandise left at the end of the selling season, and if it makes few advance purchase commitments. In these instances, the merchandising manager would have a large budget with which to operate. The opposite would occur if the effects of these variables were reversed.

2. What are the roles of planned end-of-month stock and beginning-of-month stock in determining open-to-buy levels? Explain your answer.

Open-to-buy will be higher when the retailer wants to be conservative and plans a sizable end-of-month stock; however as noted in the answer to question 1, the ending inventory for one month becomes the beginning inventory for the next month. And, when the beginning-of-month stock is large, the retailer will plan to purchase less for that month (the open-to-buy will be lower).

3. What are the pros and cons of adhering strictly to open-to-buy amounts when making purchases?

Some pros: Purchases are consistent with the overall retail strategy. Each product line is properly planned. The buyer adheres to the budget and costs are controlled. Inventory turnover and markdown performance is optimized.

Some cons: Buyer initiative is stifled. Special buying opportunities may be missed. The firm may not be responsive to the actions of competitors or to seasonal opportunities (such as an especially cold winter).

4. What would happen to the open-to-buy at cost figure in this exercise if the cost complement was changed to .75? to .55?

If the cost complement goes up, the open-to-buy at retail remains the same, but the open-to-buy at cost goes up. If the cost complement goes down, the open-to-buy at retail remains the same, but the open-to-buy at cost goes down.

PART 8: PUTTING IT ALL TOGETHER (EXERCISE 10)

EXERCISE 10: SALES OPPORTUNITY GRID

Objectives

1. To illustrate the use of a sales opportunity grid

2. To demonstrate how retail price, floor space used, operating costs, and total yearly sales estimates in units affect gross and net profit estimates at various time periods

3. To compare the shelf-space allocation of two competing brands using a variety of criteria

Key Terms and Concepts

opportunity analysis sales opportunity grid

Explanation of Exercise

As store manager for an independent supermarket, the student uses the sales opportunity grid to evaluate the profitability of both an established (Brand A) and a new brand (Brand B) of salad dressing. In this exercise, the student can vary the price, floor space used, operating costs, and yearly sales estimates for two brands of salad dressing (one established, the other new). The computer program presents the sales opportunity grid and calculates relevant data for the first month, the first six months, and the first year.

The mouse or trackball can be used to pick the value to change. New amounts can then be entered by clicking on the left and right arrow keys. Acceptable amounts are: retail price, from $1.00 to $1.60; floor space used, from 5 to 12 square feet; operating costs, from $.05 to $.15 per unit; and total yearly sales estimates in units, from 1,800 to 3,600 for each brand of salad dressing. The amounts can be entered in these increments for each brand: retail price--1 cent, floor space--1 square foot, operating costs--1 cent, and yearly sales estimate--100 units. The monthly display space cost is $1.25 per square foot for the established brand. For the new brand it is $2.50 per square foot for the first six months, it then is reduced to $1.25 per square foot in subsequent months.

The exercise is keyed to pages 516-519 in the text.

Questions/Assignments

1. Compute net profit during the first year for brands A and B using four sets of data for retail price, floor space needed, operating costs, and annual sales estimates (in units). Explain the differences in your answers.

In general terms, the student should draw these conclusions (Note: These comments assume the values of only one variable at a time are changed):

37. Revenues remain constant, but profits decline, as the floor space needed goes up.

38. Revenues remain constant, but profits decline, as operating costs go up.

39. Revenues and profits rise as the annual sales estimate goes up.

In comparing the two brands, the student should note that the 4 cents higher gross profit per unit (if both goods would sell equal quantities at the same price) is offset by brand B’s higher display costs during its first 6 months. This will reduce brand B’s profits during the first 6 months, particularly if brand B’s sales volume is low during this time period.

Students need to be cautioned about generalizing about price elasticity of demand as price elasticity can be inelastic, elastic, or unitary over different price ranges.

2. Which brand of salad dressing would offer the best long-run profit potential for the supermarket? Why? What other factors should be considered?

Based upon the default values appearing in Tables 1 and 2 in this exercise, the new brand (B) has a much stronger long-run profit potential than the established one (A). During its first six months on the market, brand B's profit estimate lags well behind brand A's. But, by the end of the year, brand B would far outperform brand A.

Brand B will be well supported by the manufacturer and offer significant product benefits to the consumer (which would justify its higher price). The desirability of the new brand should continue for some time into the future.

The retailer needs to also consider whether the manufacturer of brand A is planning to modify that brand to make it more appealing, the extra sales support that the manufacturer of brand A might provide, the brand loyalty of shoppers, etc.

Clearly, the answer would change if the data inputs are manipulated.

3. Under what conditions would you allocate space to the brand with a smaller net profit estimate for the first year? Why?

A retailer should contemplate allocating space to the brand with a smaller net profit estimate for the first year if the product category or particular product attributes is/are significantly new (thus requiring initial learning by the consumer), the brand is unknown to consumers (but the supplier promises major promotional support), the retailer's startup costs (with regard to displays and other promotional efforts) will fall as the brand becomes better known, and the firm wants to enhance its product assortment.

4. What is the difference between a sales opportunity grid and a sales-productivity ratio that allocates store space on the basis of sales per square foot?

A sales opportunity grid incorporates both revenue and cost projections, so that net profit can be estimated when comparing opportunities. A sales-productivity ratio that allocates space on the basis of sales per square foot focuses only on revenues and does not include cost or profit estimates. The latter is not as valuable a measurement tool; but the two approaches complement each other well.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download