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Spreadsheet Analysis"

Prepared To Accompany

by

Robert F. Lusch

University of Oklahoma

Patrick Dunne

Texas Tech University

transmitted or used in any form or by any means except as

provided in the South-Western end-user license agreement found

in the disk package.

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PREFACE

a family clothing store in a small college town. As you read and work with

the material in this electronic text, you can answer the problems and, if

necessary, print out your answers. The software used is Microsoft Office,

which integrates word processing (Microsoft Word) and spreadsheet

analysis (Excel). You will be able to work the problems as they are

presented since the spreadsheet worksheets are embedded into this

electronic text.

Although the spreadsheet problems are designed for computer

computation, it is possible to do all the required computations with a

calculator or by hand. Also, if you wish, you can create your own

spreadsheet programs on software other than Excel, such as Lotus 1-2-3.

If you are having problems setting up your spreadsheet please review a

tutorial on spreadsheets, see a computer lab advisor, or seek help from

your instructor who may be able to help you directly or refer you to

someone that may be of help.

The spreadsheet model is introduced in five phases which increase

in sophistication. Generally the spreadsheet exercises can be used with

any of the many retail principles and retail management textbooks on the

market. The five phases coincide with the first four parts of Retailing

(2002) by Dunne, Lusch and Griffith, however, as previously stated, the

exercises are applicable to other books. Two exercises are developed to

accompany each chapter in the first thirteen chapters of Retailing. In the

first phase, one only needs to be familiar with a few basic accounting

concepts. This phase is used to acquaint you with a basic return on asset

model. Such a model is a good frame of reference for managing profit

performance in retailing. The second phase introduces critical

environmental forces such as consumer behavior, channel behavior,

competitor behavior, legal constraints, and how changes in these

environments influence store performance. In the third phase we

incorporate certain location concepts which allow different location

decisions to be assessed. The fourth phase introduces and develops a

sixth-month merchandise budget. Finally, in phase five, certain retail

decisions such as pricing, promotion, and merchandising are discussed

and a model is developed to assess how different retail decisions will

influence store performance.

Throughout the spreadsheet exercises you will be presented with

problems that you can work to develop an understanding of important

retail concepts. However, in all exercises you will be sensitized to the fact

that everything that happens in retailing has a bottom line financial

impact. The problems are presented in brief overview scenarios of a The

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House, which is a family clothing store. You will be provided with an

electronic spreadsheet which you will use to simulate the effects of the

decisions made or phenomena occurring in The House.

Once you become familiar with the spreadsheet models introduced

in The House, you can use them to further your understanding and study

of retailing. For example, the models presented can be used in a variety

of ways.

financial performance of a store changes as a result of certain

changes in the external environment and decisions that store

managers make. This can be done by modifying some of the

assumptions in the exercises you will be presented.

• The models can be used to help you design and simulate a retail

store that you might consider opening.

• The models can be used to help you develop your own problems

that allow you to explore the many interrelationships found in

retailing.

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SPREADSHEET ANALYSIS

computerized version of a tablet of paper with columns and rows.

Historically, accountants or business people, when analyzing financial

data and other numerical data, would work with pads of paper and an

adding machine or calculator. Today such a cumbersome way of working

and computing is not necessary. This is because many brands of

computer software can provide an electronic pad of paper with columns

and rows in which data can be input and easily manipulated. This brief

overview of spreadsheet software is not intended to be comprehensive in

scope. If you are not familiar with spreadsheet software you should

consult your instructor.

In an electronic worksheet or spreadsheet there is the potential for

hundreds or thousands of rows and columns. The intersection of each row

and column is referred to as a cell. You should check the specific brand of

software you are using to determine how rows and columns can be

handled. However, even the simplest of spreadsheet programs will be

able to handle the problems presented in The House. Most spreadsheet

or worksheet software have analysis and presentation features. The

analysis portion of the software deals with how to manipulate numerical

data in the various cells of the worksheet. The presentation features deal

with how to display the results of your analysis. Our brief overview of

spreadsheet analysis will discuss some fundamentals of analysis. Since

the presentation features vary substantially with each brand of software,

you should consult the instruction manual for the software you are using.

It will be helpful for you to learn how to print tables of data and also to

present the data in a graphical format.

Fundamental Concepts

• Columns are defined by letters and rows are defined by

numbers. For example the first cell in the worksheet is defined

as A1. If we want the cell that is the intersection of the third

column and tenth row it would be labeled C10.

• The title is the description you give the worksheet. This can be

composed of both alphabetical and numerical symbols.

• Mathematical symbols often used are: + for addition, - for

subtraction, * for multiplication, and / for division.

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Entering Data

will be entered into and then typing in the numerical data. Only

numerical data can be input.

Entering Formulas

spreadsheet where the formula is applicable. For example if we want to

subtract the value in C3 from the value in C1, the formula would be: = C1

- C3. If we add C1 and C3 the formula would be: = C1 + C3; if we

multiply C1 by C3 we would have: = C1*C3; if we divide C1 by C3 we

would have: = C1/C3.

Entering Percents

spreadsheet, such as the gross margin percent, it is entered in decimal

form. For instance a 38% gross margin is entered as .38. You should also

keep this in mind when you view your results. For example, if you obtain

a return on assets of .12 you need to mentally move the decimal place

two positions to the right to obtain a 12% return on assets.

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INTRODUCTION

Anne and Fred Harris are owners and operators of The House. The

House is a family apparel store in Hamilton, a small midwestern

community of 6,237 households (excluding college students) comprising

16,529 permanent residents. Hamilton is located at the crossroads of

State Highway #43 and #62. In addition to the permanent residents

there are 2,800 full-time students who attend a small private college.

These college students, many of whom have roommates, occupy 1650

separate apartments, dormitory rooms, or other residences that are

separate from the permanent resident population. Thus, the total

households consist of 6,237 permanent and 1,650 nonpermanent, or

college student households, for a total of 7,887 households. On the other

hand the total population is 19,329, which consists of 16,529 permanent

residents and 2,800 college students.

Background

next largest town is Troy, which is 39 miles to the east and has a

population of 24,675. However, there are five smaller towns within a 15-

mile radius and range in size from 1400 to 4100 and have a total

population of 17,900. Anne and Fred took over the management of The

House after Ann's father, the founder of the store, retired in 2001. Anne's

father, Bill Henderson, started The House in 1960 after he graduated

from the local college. Initially, The House was a menswear store with

college men as its target market. However, over the years, Bill Henderson

found that the college men's market was too thin to support a store and

thus in 1963 Bill added women's apparel targeted at college females. In

1965 Bill, once again, broadened The House’s target market and added

apparel to appeal to all age groups including children.

Anne and Fred had been married for five years when they moved to

Hamilton in late October 2001 to takeover management of The House. At

the time, Fred was an assistant store manager at a JC Penney store in

Cleveland and Anne was a registered nurse at a Cleveland hospital. Anne

found the pressure of nursing in a big city hospital too demanding and

she looked favorably upon the idea of returning to Hamilton. She recalled

fondly where she grew up and the idea of managing the family business

sounded appealing. Fred was also excited about managing and owning

his own store.

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Purchase of Business

Mr. Henderson offered to sell The House to Anne and Bill for the

book value of its fixtures, equipment and inventory or $575,000. The

fixtures and equipment were valued at $75,000. The House occupied a

7000 square foot building in downtown Hamilton. The building was owned

by Mr. Henderson who agreed to lease the building to Anne and Bill for

$3,000 per month. In addition, he agreed to take a downpayment of

$125,000 on the $575,000 purchase price and to finance the remaining

$450,000 on a three year 8% interest only note with interest of $3000

due the first of each month. At the end of three years they would need to

obtain permanent financing from a source other than Mr. Henderson.

After some serious thought Anne and Fred agreed to purchase The

House from Anne's father. They took possession of the store on

November 1, 2001 just in time for the Christmas season. In 2001 sales

were $1,325,132 and of this amount $348,200 occurred during November

and December. Total assets at year-end 2001 were $585,100, which

included $158,700 in cash and $351,400 in inventory (at cost).

The House is open Monday through Wednesday from 10:00 a.m. to

6 p.m. and on Thursday through Saturday from 10 a.m. to 9 p.m. The

House is closed on Sunday and also on Thanksgiving Day, Christmas and

New Years Day. Fred and Anne work in the store daily. However, Friday

and Saturday are their busiest days. They have four full-time

salespeople, four part-time salespeople, one full-time janitor, one

bookkeeper, an accounts payable and accounts receivable clerk, a

secretary who also serves as a receptionist, and a full-time buyer who

buys womenswear and children's apparel. Mr. Henderson, in addition to

running the store the last forty years, also served as the menswear

buyer. He has agreed to continue to perform this activity for the next 12

months for a retainer of $12,000 and to take Fred along on three buying

trips. After the 12-month transition, Fred will perform the buying function

for the menswear line.

Operating Characteristics

and 25% in children apparel. In total, The House has 1765 stockkeeping

units (SKUs). Due to the variety of merchandise, prices vary considerably.

In 2001 the average transaction size was $53.45 (before sales tax) which

included on average 4.0 items. However, prices for any single item can

vary from $1.49 to $459.00. The permanent residents of Hamilton seem

to enjoy shopping at The House as evidenced by the fact that 65% of

Hamilton's total households visited The House at least once during 2001.

These households visited the store an average of 7.8 times in 2001.

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Importantly, not all store visits result in a purchase. In 2001 only 62% of

store visits resulted in a purchase.

The House has been operating on a 38% gross margin and Fred and

Anne expect this to continue for 2002. They have carefully analyzed their

expected costs for 2002 and estimate fixed operating costs per month at

$25,640 and variable operating costs at 11.2% of sales. The fixed

operating costs include a $1200 monthly salary each for Fred and Anne.

Variable operating costs include advertising costs of 3.2% of sales.

Retail Environment

There are four gasoline stations, two convenience stores, two

supermarkets, a bakery, a butcher shop, a womenswear store, a Dollar

General department store, a jewelry and gift store, a television and home

appliance store, a furniture store, an office supply and equipment store, a

True Value Hardware store, and a Wal*Mart. There is also a dry cleaner,

two Laundromats, two banks, a travel agency, six churches, one funeral

home, two used car dealers, a Chevrolet Dealership, a Ford Dealership, a

farm and feed supply store, a movie theater, two real estate agencies,

three insurance agencies, five barbers/beauticians, six fast food

restaurants, two grills that cater to college students, two family style

cafes, an Optometrist, four family physicians, a Pediatrician, an

Optometrist, and three dentists. The House is located on the town square

where a bank, county government offices, one of the family style cafes,

the womenswear store and the Family Dollar department store exist.

There are also two vacant stores on the Town Square, which have been

vacant for 18-24 months. Also on the town square is an insurance agent,

real estate agent, barber, travel agent, and two law offices. At the

eastern edge of town there is an eight year old, 85,000 square foot

Wal*Mart discount department store. The local college is a half-mile north

of downtown Hamilton.

Special Note

The House before you begin each exercise. Data is provided in this

description which can be used to help solve some of the exercises.

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PHASE ONE SPREADSHEET MODEL:

BASIC CONCEPTS

one--"Introduction To Retailing" of Retailing (2002) by Dunne, Lusch and

Griffith. For phase one you need to understand the following concepts:

paid suppliers (including freight) for the merchandise the retailer

sells during the period. Cost of merchandise as a percent of

sales is 100% minus the gross margin percent.

Sold. Gross margin percent is the Gross Margin as a percent of

sales.

proportionately with the sales volume of the store. For example

if variable costs are 30% of sales then for each one-dollar

increase in sales the variable costs rise 30 cents. Common

examples of variable costs in retailing are sales commissions

and advertising.

regardless of the level of sales. Common fixed costs in retailing

are insurance, interest on debt, certain salaries, and rent.

variable operating costs.

are subtracted from gross margin.

• Total Assets is the value of the things the retailer owns, which

it uses to operate its business. Examples of assets include

fixtures, equipment, cash and inventory.

Also you will need to know that the notation used is as follows: (+)

designates addition, (-) designates subtraction, (/) designates division, (*)

designates multiplication. Incidentally, this is the only level of math you

will need to work the simulation exercises. When multiplication occurs

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you can round off your answer to the nearest one-hundredth of a decimal

(i.e. have two digits to the right of the decimal point) or you should feel

free to use higher precision if you desire. Naturally, when a series of

multiplications occur a rounding error will occur. You should not be

worried about such minor differences in computations.

In addition to the preceding, you need to understand some

important relationships between the preceding concepts. These

relationships are best understood in terms of three basic financial ratios.

Repeatedly throughout the simulations you will see that the impact of

changes in the retail business have an ultimate effect on these three

financial ratios.

sales. If the net profit margin is 3%, it says that on each dollar of

sales the retailer has earned 3 cents of net profit.

If this ratio is 4 times, it says that the retailer generates $4 in

sales for each dollar invested in assets.

return on assets is 12%, it says that the retailer has earned 12

cents on each dollar invested in assets.

You also need to know that the net profit margin multiplied by the rate of

asset turnover yields return on assets. This basic relationship is

illustrated with the following equation:

assets)

OR

The simulation model you will be working with in phase one will

look like the following:

SAMPLE SPREADSHEET

PHASE ONE

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Baseline Model Model-A Model-B

net sales $1,325,132

cost of merchandise sold $821,582

gross margin $503,550

variable operating cost $148,415

fixed operating cost $307,680

total operating cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

If you double click on this spreadsheet you will bring up the Excel

software. You can click on the different cells in this spreadsheet and see

how each of the elements is defined. Note that for each cell we either

entered a number or a formula. For example for net sales we entered

$1,325,132, however, for cost of merchandise sold we entered the

formula: Net Sales * (1 - gross margin %) or B2 * (1 - .38). B2 is the

location of net sales and .38 represents the 38% gross margin percent

The House experienced.

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PHASE ONE

EXERCISE ONE-A

Store Performance

ceramic giftware, has announced it will close its plant which employs 175

people. The employees of Creative Ceramics represent 155 households

with a total population of 450. It is estimated that two-thirds of these

households will leave Hamilton for other employment. Anne and Fred

estimate that the effect of this will be to lower sales between 3 and 5%

for 2002 from their 2001 level. Please simulate the impact of a 3%, 4%,

and 5% decline in 2002 sales on the net profit margin, asset turnover,

and return on assets.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet, which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the three scenarios (3%, 4%, and 5% sales declines) in the

simulation. If the formula or number does not change from the baseline,

you can simply copy these formulas or numbers into the empty cells

under the various scenarios. HINT--one way to do this is to simply

copy all of the data or formulas in column one (baseline model)

into the following three columns. Once this is done you can go

into the sales cells (B2, C2, D2) and alter the level of sales. All of

the remaining changes will be made automatically due to the

simulation nature of this software. Be sure to save your work and

print a copy once you are satisfied with its correctness. After you

complete your simulation there are two questions you need to answer.

These can be answered by typing your responses below the questions,

saving your work, printing a copy, and handing it in to the instructor if

required.

.

EXERCISE ONE-A

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Baseline Model 3% sales drop 4% sales drop 5% sales drop

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

var operating cost $148,415

fixed operating cost $307,680

total operating cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

Why?

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PHASE ONE

EXERCISE ONE-B

Store Performance

Anne and Fred just learned that the local gift and jewelry store is

cutting back its line of women’s apparel and giftware. The apparel

consisted largely of scarves, silk blouses, nightwear, and sweaters. As a

result, they expect that sales at The House will rise 1% or 2% in 2002

compared to 2001.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the three scenarios (1%, 1.5%, and 2% sales increase) in the

simulation. If the formula or number does not change from the baseline,

you can simply copy these formulas or numbers into the empty cells

under the various scenarios. HINT--one way to do this is to simply

copy all of the data or formulas in column one (baseline model)

into the following three columns. Once this is done you can go

into the sales cells (B2, C2, D2) and alter the level of sales. All of

the remaining changes will be made automatically due to the

simulation nature of this software. Be sure to save your work and

print a copy once you are satisfied with its correctness. After you

complete your simulation there are two questions you need to answer.

These can be answered by typing your responses below the questions,

saving your work, printing a copy and handing it in to the instructor if

required.

EXERCISE ONE-B

$1,325,132

$821,582

$503,550

$148,415

$307,680

$456,095

$47,455

3.58%

2.265

8.11%

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QUESTIONS

competition? Why?

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PHASE ONE

EXERCISE TWO-A

Strategies on Store Performance

Anne and Fred Harris have decided that in 2002 they will pursue a

new marketing and financial strategy in which their goal will be a higher

market share. They have noted that many households have been

shopping for apparel out of town, especially in Troy, which has a 400,000

square foot covered mall that includes two department stores and 18

specialty stores. Anne and Fred have developed two alternative

strategies: (a) they would increase store hours by being open seven days

a week and thus fixed costs would rise from $25,640 monthly to $30,000

per month, but as a result they expect a 15% sales increase; (b) they

would keep store hours the same but would introduce a mail order

catalog to be mailed four times a year to all households in town and to

the five outlying towns. Under this alternative the fixed operating costs

would rise to $40,000 and variable operating costs would increase by

1.2% of sales. Sales would be projected to increase 36%. Under either

strategy they do not expect a rise in total assets. With the increased

store hours Fred and Anne Harris have no need to invest in additional

inventory, store fixtures, or other assets. In the case of the direct mail

program the production and mailing of the catalog will be contracted out,

therefore no additional investment in assets will be required. Which

alternative should they pursue?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (expanded store hours or direct mail catalog) in

the simulation. If the formula or number does not change from the

baseline, you can simply copy these formulas or numbers into the empty

cells under the various scenarios. Be sure to save your work and print a

copy once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy, and handing it in to the instructor if required.

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EXERCISE TWO-A

$1,325,132

$821,582

$503,550

$148,415

$307,680

$456,095

$47,455

3.58%

2.265

8.11%

QUESTIONS

1. Should The House change its financial and marketing strategy? Why?

2. What are some of the reasons that the projections made for either the

expanded store hours scenario or the direct mail catalog scenario may

not materialize as projected? Is one option more risky?

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PHASE ONE

EXERCISE TWO-B

Strategies on Store Performance

dresses. They believe that these higher priced dresses ($95-$295) will

result in a sales increase of 7%. To provide a proper merchandise

assortment, an additional investment in inventory of $38,000 would be

required. It is expected that as a result of this 7% sales increase, due to

the sale of higher priced dresses, the storewide gross margin percent

would rise by 1%.

Total assets at year-end 2001 were $585,100, which included

$58,700 in cash and $351,400 in inventory (at cost). The House could

finance the additional inventory with a combination of cash and trade

credit. If this strategy is pursued then total assets will remain at

$585,100 but cash on hand will decline. However, Anne and Fred are

concerned that the company have an adequate level of cash on hand for

emergencies or opportunistic buys. As a result, they are considering

investing another $12,000 in cash in the business. If this strategy is

pursued then total assets would rise to $597,100. What will happen to

financial performance if they invest the additional $12,000 vs. financing

the inventory from existing resources in the business?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (finance internally or finance externally) in the

simulation. If the formula or number does not change from the baseline,

you can simply copy these formulas or numbers into the empty cells

under the various scenarios. Be sure to save your work and print a copy

once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy, and handing it in to the instructor if required.

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EXERCISE TWO-B

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

investment? Why?

2. What are some of the other factors that need to be considered when

making this decision? Please explain.

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PHASE TWO SPREADSHEET MODEL:

BASIC CONCEPTS

The problems you will work in phase two relate to Part Two--"The

Retailing Environment" of Retailing by Dunne, Lusch and Griffith. For

Phase Two of The House you need to understand concepts related to the

retailing environment. These concepts deal with the customer,

competition, channel, and the legal environment. The following concepts

are important to understand:

trade area of the retail store; this is also often called the number

of prospects.

trade area of the retail store who visit the store within a year.

a year that a household visits the store.

annually.

end up purchasing.

purchase.

transaction

the preceding concepts:

shopping frequency)

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For example, if a retailer has a market coverage of 20,000 households,

has a penetration level of 60%, and the typical household visits the store

six times annually, then the traffic will be (20,000)*(60%)*(6) or 72,000.

In brief, the store has 72,000 household visits a year. Now consider that

the closure on these visits is 50% then the number of transactions on an

annual basis is (72,000)*(50%) or 36,000. Finally, if the average

transaction size is $10 then the annual net sales would be (36,000)*($10)

or $360,000.

SAMPLE SPREADSHEET

PHASE TWO

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

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PHASE TWO

EXERCISE THREE-A

Store Performance

spectrum of households. At the local college, enrollments are projected to

rise by 600 students next year and 20 additional faculty will be recruited.

In the past, Anne and Fred have found that both faculty and college

students spend more on clothing and shop often at The House. However,

students tend to spend mostly on fill-in items, while purchasing their

more complete wardrobe needs elsewhere, usually at their permanent

home. On the other hand, faculty tend to purchase most of their clothing

needs at The House.

Based on these improved demographics, Anne and Fred are

projecting that for 2002 that the market coverage would rise to 8,100

from 7,887. For 2001, the average shopping frequency was 7.8 times per

year, average transaction size was $53.45, and closure was 62%. They

do not expect a change in these statistics. What would happen to the

financial performance of The House under this scenario?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the scenario (8,100 market coverage) in the simulation. If the

formula or number does not change from the baseline, you can simply

copy these formulas or numbers into the empty cells under the various

scenarios. Be sure to save your work and print a copy of it once you are

satisfied with its correctness. After you complete your simulation there

are two questions you need to answer. These can be answered by typing

your responses below the questions, saving your work, printing a copy

and handing it in to the instructor if required.

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EXERCISE THREE-A

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

influence on store performance?

faculty? Why or why not?

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PHASE TWO

EXERCISE THREE-B

Target Market

on Store Performance

Anne and Fred have noted that many of their customers are middle

age households in the community. These are good loyal customers,

however, The House could do a better job of attracting college students

and encouraging them to purchase their entire, or most, of their college

wardrobe needs at The House. Fred decided to invite to lunch five college

males who were active in fraternities. Similarly, Anne invited to lunch five

coeds who were active in their sorority. At the lunch both Fred and Anne

asked them why they don't purchase more of their wardrobe needs at

The House. Both groups felt The House was a good choice for fill in and

staple purchases such as underwear and hose and an occasional sport

shirt or casual dress. However, the students (both male and female)

believed that The House had a very poor selection of casual clothing for

college students. In addition, they did not like shopping at a store that

catered to all family members.

That evening Anne and Fred brainstormed while they had dinner.

They decided that one possible way to serve the college market would be

to develop a special area within their store called the College Shop. In

this shop within the store they would feature cotton twill slacks and

dresses, polo style sport shirts, belts, Bass loafers, and moderately priced

tweed and navy blazers for men, white oxford dress shirts, and a

selection of ties.

To help promote the College Shop they would also appoint a fashion

advisory board of three college males and three college females, meet

with them monthly, and pay them $50 per meeting. In addition, they

would commit to advertising weekly in the college newspaper, but this

cost would be reallocated from their existing advertising budget. Finally,

it was estimated that a total inventory investment of $85,000 would be

needed for the College Shop, however, $35,000 of this amount could be

reallocated from current merchandise lines that would be phased out.

The additional $50,000 inventory investment would be financed with

existing cash balances and trade payables. Anne and Fred expected that

penetration among college students would rise to 55%, thus increasing

the market penetration to 70% from 65%. To be conservative in their

estimates they assumed that closure and average transaction size would

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be unaffected but that average shopping frequency would rise to eight

times per year.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (70% penetration & average shopping frequency

7.8 or 70% penetration & average shopping frequency 8.0) in the

simulation. If the formula or number does not change from the baseline,

you can simply copy these formulas or numbers into the empty cells

under the various scenarios. Be sure to save your work and print a copy

once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy and handing it in to the instructor if required.

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EXERCISE THREE-B

Baseline Model 70% Pen & Avg Frq 7.8 70% Pen & Avg Frq 8.0

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

transactions? Why is traffic so important in retailing?

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PHASE TWO

EXERCISE FOUR-A

and Wal*Mart on Store Performance

Anne’s father, the prior owner of The House, left a complete set of

books for 20 years. Fred was able to enter the annual sales data into his

personal computer and graph annual sales over time. What became very

clear was that sales increases would almost identically match the general

rate of inflation. This suggested that The House probably had not

experienced any real growth in sales since 1980. During this period the

competitive situation has also been quite stable. However, recently the

local Dollar General store reconfigured its store layout to devote more

space to womenswear. At the same time the local Wal*Mart has devoted

more space to womenswear. As a consequence, more women are

shopping locally for clothing at these two stores. Fred and Anne estimate

that average shopping frequency could drop to 7.5 or possibly as low as

7.0 times a year. What would be the impact on store performance?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (average shopping frequency 7.5 or average

shopping frequency 7.0) in the simulation. If the formula or number does

not change from the baseline, you can simply copy these formulas or

numbers into the empty cells under the various scenarios. Be sure to

save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required.

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EXERCISE FOUR-A

Baseline Model Avg Shopping Frq = 7.5 Avg Shopping Frq = 7.0

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

1. Why did the drop in average shopping frequency have such a dramatic

impact on store performance?

what do you recommend?

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PHASE TWO

EXERCISE FOUR-B

Direct Mail Retailers on Store Performance

increasing number of direct mail catalogs from retailers such as L.L.

Bean, Lands End, Eddie Bauer, and J. Peterman. These direct marketers

offer good quality apparel for a fair price and provide 2-5 day delivery of

merchandise via Federal Express. Fred estimates that this increased

competition will have two impacts: lower average shopper frequency and

reduced average transaction size. If each of these dropped 5%, what

would happen to store performance? If each dropped 10%, what would

happen to store performance?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (average shopping frequency and average

transaction size drop 5% or 10%) in the simulation. If the formula or

number does not change from the baseline, you can simply copy these

formulas or numbers into the empty cells under the various scenarios. Be

sure to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required.

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EXERCISE FOUR-B

Baseline Model Avg Frq & Trn Sze Drp 5% Avg Frq & Trn Sze Drp 10%

market coverage 7887

penetration level 0.65

avg shop frequency 7.8

traffic 39987

closure rate 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

Why?

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2. What actions might The House take to combat this direct mail

competition?

PHASE TWO

EXERCISE FIVE-A

Anne and Fred have been traveling twice a year to the Apparel

Market in New York City. Recently they learned of an apparel wholesaler

who sells primarily via an electronic catalog. Customers of this wholesaler

can use their personal computer and their telephone to access this

catalog and receive color pictures of all merchandise. All orders can be

placed and paid electronically. To purchase the proper modem and

software will cost $500 and telephone charges would be $50 monthly.

This $500 for software and modem should be treated as an increased

cost vs. an asset since it is likely that regular software updates and new

modems that are faster will be purchased annually. The wholesaler sells

apparel at the same prices as could be obtained by purchasing direct

from manufacturers. In addition this wholesaler pays all freight charges

on orders over $4,500. Currently Fred and Anne are paying all freight

charges, therefore they expect to save 2% of sales. Since Anne and Fred

will only need to take one trip a year to New York City to observe apparel

trends, they will also save $5,850 per year in travel costs. What would be

the impact on store performance of switching to this wholesaler?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the new wholesaler scenario in the simulation. If the formula or

number does not change from the baseline, you can simply copy these

formulas or numbers into the empty cells under the new scenario. Be

sure to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy, and handing it in

to the instructor if required.

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EXERCISE FIVE-A

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

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2. What other advantages might accrue to The House as a result of

dealing with this wholesaler? How might these impact other variables in

the simulation model?

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PHASE TWO

EXERCISE FIVE-B

meeting, Fred met Carolyn Neal, who was the owner of a cut and sew

apparel manufacturing facility in a small town in the southeastern part of

the state. Carolyn was primarily making apparel for large retailers such

as Wal*Mart, however, she felt she was becoming too dependent on only

a few large customers and wanted to diversify her customer base. Fred

obtained her business card. When he returned home he called Carolyn

and arranged for Anne and himself to have dinner with her to discuss

some business possibilities. Carolyn suggested she manufacture a line of

private label women's and girl's apparel. If The House could guarantee to

purchase $20,000 per quarter with a minimum order of $15,000, and pay

within 30 days of shipment, then Carolyn would be willing to private label

merchandise for The House. Both Fred and Anne believe that their own

store apparel label will help enhance the image of The House and,

consequently, attract more business.

After discussing the possibility for a few weeks, Fred and Anne

decided to move forward on contracting for the development of their own

store brand of women's and girl's apparel. They negotiated a price that

would essentially increase their storewide gross margin to 40%, however,

with the high minimum order size, their inventory investment would rise

by $16,000, and thus they expect total assets to rise a similar amount.

The House will spend an additional $20,000 a year on advertising this

new line of merchandise. It is estimated that the new private label will

result in penetration increasing to 67% or 68%.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (penetration 67% or 68%) in the simulation. If

the formula or number does not change from the baseline, you can

simply copy these formulas or numbers into the empty cells under the

various scenarios. Be sure to save your work and print a copy once you

are satisfied with its correctness. After you complete your simulation

there are two questions you need to answer. These can be answered by

typing your responses below the questions, saving your work, printing a

copy, and handing it in to the instructor if required.

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EXERCISE FIVE-B

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure rate 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

brand of women's and girl's apparel?

developing a private brand? How might these impact other variables in

the simulation model?

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PHASE TWO

EXERCISE SIX-A

on Store Performance

Recently, legislation was passed and will take effect in early 2002

that will require commercial buildings to have sprinkler systems for fire

control purposes. The building The House occupies is 45 years old and is

not equipped with a sprinkler system. Anne and Fred recently received a

letter from Bill Henderson (Anne's father) informing them that he can't

afford the $42,000 to install the sprinkler at the current lease rate of

$3,000 monthly. The Harris’ lease expires at the end of 2001 and Bill

Henderson has presented them two options. Option one is to extend their

lease until 2006 and have The House pay the leasehold improvement

costs, and then write these leasehold improvements off over the five

years of the new lease. Under this option their rent would remain at

$3000 monthly. The House would use its line of credit at the bank to

borrow $42,000 at 10% interest. The sixty monthly principal and interest

payments on this loan would be $892.38 and the entire amount could be

written off as a business expense. Option two would be to enter into a

new annual lease at $4000 per month. Which option should they take?

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (increased rent vs. making leasehold

improvements) in the simulation. HINT: For the leasehold

improvement option, assume that total assets rise by $42,000,

which is the amount of leasehold improvements. If the formula or

number does not change from the baseline, you can simply copy these

formulas or numbers into the empty cells under the various scenarios. Be

sure to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required.

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EXERCISE SIX-A

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure rate 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

be made?

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PHASE TWO

EXERCISE SIX-B

Store Performance

considering enacting a national sales tax of 1 or 2% on all non-food

purchases. So that customers of The House will not feel this impact if the

federal government proceeds with this tax, they have decided to absorb

the costs of this federal legislation. Please simulate the impact of this

action on the net profit margin, asset turnover, and return on assets.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (1% national sales tax or 2% national sales tax)

in the simulation. HINT: For the absorption of the rise in sales tax,

increase the variable operating expenses. If the formula or number

does not change from the baseline, you can simply copy these formulas

or numbers into the empty cells under the various scenarios. Be sure to

save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy, and handing it in

to the instructor if required.

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EXERCISE SIX-B

market coverage 7887

penetration level 0.65

avg shopping frequency 7.8

traffic 39987

closure rate 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,132

cost of mdse sold $821,582

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

1. Which financial ratio was most impacted by the national sales tax? Why?

2. Should The House attempt to absorb all of the national sales tax into its

cost of doing business and not pass on any increase to the customer? Why or

why not?

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PHASE THREE SPREADSHEET MODEL:

BASIC CONCEPTS

Three--"Location Analysis" of Retailing (2002) by Dunne, Lusch and

Griffith. The new concepts you need to be familiar with concern the trade

area of a retail store. Previously we discussed market coverage. In this

phase we learn about the determinants of market coverage. An

understanding of the following terms is necessary:

its customers.

• trade radius is the number of miles from the store from which

customers are attracted. This concept assumes that a store's

trade area is represented by a circle surrounding the store. The

trade radius would be the radius of that circle.

square mile within the store's trade area. In this simulation we

use households as the measure of population density.

introduced in phase two, with the preceding concepts, one can obtain the

following relationship.

or household density)

To understand the preceding you need to recall that the formula for

the area of a circle is pi times the square of the radius of the circle.

Where pi is the mathematical constant of 22/7 or 3.142857. Recall that

we are assuming that the trade area is circular. If we take pi times the

radius squared we get the number of square miles in a circle or the

number of square miles in the trade area. If we then multiply this by the

population or household density we obtain the total number of people or

households in the trade area, or what we refer to as market coverage.

The spreadsheet model you will be working with in the phase three

exercises is as follows:

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SAMPLE SPREADSHEET

PHASE THREE

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

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PHASE THREE

EXERCISE SEVEN-A

customers from a three-mile radius that encompasses the entire

community.

Fred and Anne are considering opening a second store at the edge

of town across the street from the Wal*Mart Discount Department Store.

The Wal*Mart attracts people from the local community and the

surrounding five smaller towns which are within a 15-mile radius of the

Wal*Mart. The population density within this 15-mile trade area averages

21.2 households per square mile.

The building Fred and Anne are considering leasing is 4500 square

feet. Hours of operation would be 10 a.m. to 8 p.m., Monday-Saturday.

They expect monthly fixed operating costs (which include rent) to

be $9000 and variable operating costs to be 12% of sales. They expect

that the average transaction size will be $ 37.50. This is considerably

lower than their main store because they believe that most customers

will be attracted to shop at the store while they are making a trip to

Wal*Mart. Thus, they believe most purchases will be fill-in purchases and

not as a result of a destination visit to the store to purchase specific

merchandise. The gross margin percent is expected to be the same as for

the main store of The House.

Virtually all of the visits will be due to intercepting traffic from the

Wal*Mart across the street. They estimate that the Wal*Mart has a 90%

penetration level and an average shopping frequency of 14. Fred and

Anne estimate that their penetration the first year will be 36% and the

average shopping frequency will be 2.5 times per year. In the second

year they expect the penetration to rise to 42% and average shopping

frequency to rise to 3.0 times per year. For both years they estimate

closure will be 65%.

Approximately $80,000 will need to be invested in leasehold

improvements and fixtures and $140,000 in inventory. They will also plan

to have $30,000 in cash available when they start business for

unexpected expenses or losses. Thus, they expect their total assets to be

$250,000.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (year one and year two of the new retail store) in

the simulation. Note that there are no baseline formulas for this problem.

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Since you are starting a new store there is no base of comparison. Thus

for the first year you need to enter the formula and/or data for each row.

HINT: You can refer back the phase three prototype model to see

how some of the formulas are set up. If the formula or number does

not change from the baseline you can simply copy these formulas or

numbers into the empty cells under the various scenarios. Be sure to

save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required

EXERCISE SEVEN-A

trade radius

population density

market coverage

penetration level

avg shopping frquency

traffic

closure

transactions

avg transaction size

net sales

cost of mdse sold

gross margin

varaible op cost

fixed op cost

total op cost

net profit

net profit margin

asset turnover

return on assets

QUESTIONS

Explain.

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2. Do you have any suggested strategies that would make The House

more profitable in the first year of operation?

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PHASE THREE

EXERCISE SEVEN-B

Fred and Anne are concerned with how their proposed new store

may impact the performance of their existing store. Both believe their

trade area will continue to be a three-mile radius within which the

population density is 278.833 households per square mile. However,

because their new store will somewhat cannibalize their existing store,

they have predicted that their penetration would drop to 62% and

average shopping frequency would decline to 7.5 times. On the other

hand, they believe that they can partially counteract this cannibalization

by working more diligently to improve closure. They believe that closure

can rise from 62% to 65% with more selling effort.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the cannibalization scenario. If the formula or number does not

change from the baseline, you can simply copy these formulas or

numbers into the empty cells under the cannibalization scenario. Be sure

to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required.

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EXERCISE SEVEN-B

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg transaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

1. What is the financial impact of the proposed new store on the existing

store?

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2. Can you think of any other things that might be done to minimize the

cannibalization effect of the new store?

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PHASE FOUR SPREADSHEET MODEL:

BASIC CONCEPTS

The problems you will work in phase four relate to chapters 8 and 9

in Part Four--"Managing Retail Operations" of Retailing (2002) by Dunne,

Lusch and Griffith.

Chapters 8 and 9 deal with financial planning but focus primarily on

developing a six-month merchandise budget. For the problems in this

section you need to understand the following concepts which will allow

you to develop a six-month merchandise budget.

the month)*(planned total sales)

• planned BOM stock for the month. There are three methods

we will deal with:

the month = (planned sales for the month)*(planned BOM

Stock-to-Sales Ratio for the month)

2. the basic stock method. The planned BOM stock for the

month = basic stock + planned monthly sales. Where the

basic stock = average stock for the season - average

monthly sales for the season

stock for the month = (average stock for

season)*(1/2)[1+(planned sales for the month/average

monthly sales)]

for the month)*(planned retail reduction percentage for the

month)

• planned EOM stock for the month = (planned BOM stock for

the following month)

for the month) + (planned retail reductions for the month) +

(planned EOM stock for the month) - (planned BOM stock for the

month)

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• planned purchases at cost for the month = (planned

purchases at retail for the month) * (100% - planned initial mark

up percentage)

at retail for the month) - (planned purchases at cost for the

month)

markup for the month) - (planned retail reductions for the

month)

exercises 9a and 9b the framework will be slightly modified and this will

be explained shortly. Please note that this sample budget is not yet set

up as a spreadsheet, it is simply a table which represents what a six-

month merchandise budget should look like.

SAMPLE

SIX-MONTH MERCHANDISE BUDGET

Planned

BOM

Stock

Planned

Sales

Planned

Retail Re-

ductions

Planned

EOM

Stock

Planned

Purchases

at Retail

Planned

Purchases

at Cost

Planned

Initial

Markup

Planned

Gross

Margin

Planned

BOM Stock

-to-Sales

Ratio

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Planned

Sales

Percentage

Planned

Retail

Reduction

Percentage

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PHASE FOUR

EXERCISE EIGHT-A

Using BOM Stock to Sales Method

for The House for the first six months of 2002. Planned sales for the first

half of 2002 are $620,000 and this is divided as follows: February = 9%,

March = 11%, April = 14%, May = 21%; June = 22%; July = 23%. Planned

total retail reductions are 5% for February and March, 8% for April and

May, and 12% for June and July. The planned initial markup percentage is

47%. The planned BOM Stock-to-Sales ratio for each month is as follows:

February = 5.9, March = 5.2, April = 5.0, May = 5.0, June = 4.0, July =

5.0. Also they want to begin the second half of the year with $650,000 in

inventory at retail.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled.

You will need to study the formulas below and enter them into the

spreadsheet. Be sure to save your work and print a copy of it once you

are satisfied with its correctness.

The formula for each row is as follows:

• planned BOM stock for the month = (planned sales for the

month)*(planned BOM Stock-to-Sales Ratio for the month)

the month)*(planned total sales or $620,000)

for the month)*(planned retail reduction percentage for the

month)

• planned EOM stock for the month = (planned BOM stock for

the following month)

for the month) + (planned retail reductions for the month) +

(planned EOM stock for the month) - (planned BOM stock for the

month)

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• planned purchases at cost for the month = (planned

purchases at retail for the month) * (1.0 - planned initial mark up

percentage)

at retail for the month) - (planned purchases at cost for the

month)

markup for the month) - (planned retail reductions for the

month)

March, 5.0 for April and May, 4.0 for June and 5.0 for July.

11%, April 14%, May 21%, June 22%, July 23%.

February and March, 8% for April and May, and 12% for June and

July.

EXERCISE EIGHT-A

Plan BOM Stock

Plan Sales

Plan Rtl Reductions

Plan EOM Stock

Plan Purch @ Rtl

Plan Purch @ Cost

Plan Initial Markup

Plan Gross Margin

Plan BOM Stk to Sales

Plan Sales %

Plan Rtl Reduction %

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PHASE FOUR

EXERCISE EIGHT-B

BOM Stock to Sales Method

for The House for the first six months of 2002. Planned sales for the first

half of 2002 are $620,000 and this is divided as follows: February = 9%,

March = 11%, April = 14%, May = 21%; June = 22%; July = 23%. Planned

total retail reductions are 8% for February and March, 5% for April and

May, and 10% for June and July. The planned initial markup percentage is

47%. The planned BOM Stock-to-Sales ratio for each month is as follows:

February = 6.1, March = 5.3, April and May = 5.0, and June = 4.1, July =

5.2. Also they want to begin the second half of the year with $650,000 in

inventory at retail.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled.

You will need to study the formulas below and enter them into the

spreadsheet. Be sure to save your work and print a copy of it once you

are satisfied with its correctness.

The formula for each row is as follows:

• planned BOM stock for the month = (planned sales for the

month)*(planned BOM Stock-to-Sales Ratio for the month)

the month)*(planned total sales or $620,000)

for the month)*(planned retail reduction percentage for the

month)

• planned EOM stock for the month = (planned BOM stock for

the following month)

for the month) + (planned retail reductions for the month) +

(planned EOM stock for the month) - (planned BOM stock for the

month)

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• planned purchases at cost for the month = (planned

purchases at retail for the month) * (1.0 - planned initial mark up

percentage)

at retail for the month) - (planned purchases at cost for the

month)

markup for the month) - (planned retail reductions for the

month)

March, 5.0 for April and May, 4.1 for June, and 5.2 for July.

11%, April 14%, May 21%, June 22%, July 23%.

February and March, 5% for April and May, and 10% for June and

July.

EXERCISE EIGHT-B

Plan BOM Stock

Plan Sales

Plan Rtl Reductions

Plan EOM Stock

Plan Purch @ Rtl

Plan Purch @ Cost

Plan Initial Markup

Plan Gross Margin

Plan BOM Stk to Sales

Plan Sales %

Plan Rtl Reduction %

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PHASE FOUR

EXERCISE NINE-A

Using the Basic Stock Method

for The House for the first six months of 2002. They have decided to

utilize the basic stock method of merchandise budgeting. Planned sales

for the first half of 2002 are $620,000 and this is divided as follows:

February = 9%, March = 11%, April = 14%, May = 21%; June = 22%; and

July = 23%. Planned total retail reductions are 8% for February and

March, 5% for April and May, and 12% for June and July. The planned

initial markup percentage is 47%. They desire the rate of inventory

turnover for the season to be two times. Also they want to begin the

second half of the year with $390,000 in inventory at retail.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled.

You will need to study the formulas below and enter them into the

spreadsheet. Be sure to save your work and print a copy once you are

satisfied with its correctness.

The formula for each row is as follows:

monthly sales

sales for the season

for the season/number of months in the season

• average stock for the season = total planned sales for the

season/estimated inventory turnover rate for the season

the month)*(planned total sales or $620,000)

for the month)*(planned retail reduction percentage for the

month)

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• planned EOM stock for the month = (planned BOM stock for

the following month)

for the month) + (planned retail reductions for the month) +

(planned EOM stock for the month) - (planned BOM stock for the

month)

purchases at retail for the month) * (1.0 - planned initial mark up

percentage)

at retail for the month) - (planned purchases at cost for the

month)

markup for the month) - (planned retail reductions for the

month)

11%, April 14%, May 21%, June 22%, July 23%.

February and March, 5% for April and May, and 12% for June and

July.

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EXERCISE NINE-A

Plan BOM Stock

Basic Stock

Avg Monthly Sales

Avg Stk for Season

Plan Sales

Plan Rtl Reductions

Plan EOM Stock

Plan Purch at Rtl

Plan Purch at Cost

Plan Initial Markup

Plan Gross Margin

Plan Sales %

Plan Rtl Reductn %

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PHASE FOUR

EXERCISE NINE-B

Using the Percentage Variation Method

for The House for the first six months of 2002. They have decided to

utilize the percentage variation method of merchandise budgeting.

Planned sales for the first half of 2002 are $620,000 and this is divided as

follows: February = 9%, March = 11%, April = 14%, May = 21%; June =

22%; July = 23%. Planned total retail reductions are 8% for February and

March, 5% for April and May, and 12% for June and July. The planned

initial markup percentage is 47%. They desire the rate of inventory

turnover for the season to be two times. Also they want to begin the

second half of the year with $390,000 in inventory at retail.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled.

You will need to study the formulas below and enter them into the

spreadsheet. Be sure to save your work and print a copy once you are

satisfied with its correctness.

The formula for each row is as follows:

season *(1/2)[1+(planned sales for the month/average monthly

sales)]

for the season/number of months in the season

• average stock for the season = total planned sales for the

season/estimated inventory turnover rate for the season

the month)*(planned total sales or $620,000)

for the month)*(planned retail reduction percentage for the

month)

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• planned EOM stock for the month = (planned BOM stock for

the following month)

for the month) + (planned retail reductions for the month) +

(planned EOM stock for the month) - (planned BOM stock for the

month)

purchases at retail for the month) * (1.0 - planned initial mark up

percentage)

at retail for the month) - (planned purchases at cost for the

month)

markup for the month) - (planned retail reductions for the

month)

11%, April 14%, May 21%, June 22%, July 23%.

February and March, 5% for April and May, and 12% for June and

July.

EXERCISE NINE-B

Plan BOM Stock

Avg Monthly Sales

Avg Stck for Season

Plan Sales

Plan Rtl Reductions

Plan EOM Stock

Plan Purch at Rtl

Plan Purch at Cost

Plan Initial Markup

Plan Gross Margin

Plan Sales %

Plan Rtl Reductn %

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PHASE FIVE SPREADSHEET MODEL:

BASIC CONCEPTS

The problems you will work in phase five relate to chapters 9-13 in

Part Four--"Managing Retail Operations" of Retailing (2002) by Dunne,

Lusch and Griffith. These decisions are primarily merchandising, pricing,

advertising and promotion, store design and layout, and personal selling.

To complete the problems in this section you need to understand

the following concepts:

the typical customer purchases on a visit to the store

for an item purchased at the store

sold by the store over a one year period

transactions we can establish the following relationships.

purchased) * ( average item price)

purchased)/(total transactions)

The spreadsheet model you will be working with in the phase five

exercises is as follows:

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SAMPLE SPREADSHEET

PHASE FIVE

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items purchsed 5

total items purchased 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable operating cost $148,415

fixed operating cost $307,680

total operating cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

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PHASE FIVE

EXERCISE TEN-A

Fred and Anne have built a very loyal group of customers that

patronize The House. Although only 62% of visitors actually make a

purchase, they purchase an average of five items. These items have an

average item price of $10.69, which results in an average transaction

size of $53.45. The cost of goods is 62% of sales and the gross margin

return on sales is 38%. Anne has argued that they should be less

concerned with closure and more concerned with higher prices and thus a

higher gross margin percent. She has proposed that they raise prices by

10%. Under this scenario the cost of goods sold as a percent of sales

would be (.62/1.1) or 56.36% and the gross margin return on sales would

be 43.64% (100% - 56.36%).

Fred has argued that if they raise prices by 10% that average items

sold per customer would drop 20%. On the other hand, Anne argues that

their customers are not that aware of prices and that although some

customers will decide not to buy due to the higher prices, that this will

not be large. She believes that a 10% price increase will result in a 12%

drop in average items purchased.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (10% price increase and 12% or 20% reduction

in average number of items purchased) in the simulation. If the formula

or number does not change from the baseline, you can simply copy these

formulas or numbers into the empty cells under the various scenarios. Be

sure to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy, and handing it in

to the instructor if required

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EXERCISE TEN-A

Baseline Model Av Itms Purch Drp 12% Av Itms Purch Drp 20%

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items purchs 5

total items purchs 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

the price increase? Explain.

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PHASE FIVE

EXERCISE TEN-B

profitable then shouldn't they also consider what might happen if they

dropped prices by 10%? He argued that with a 10% price decrease that

the average number of items purchased would go up by at least 20%.

Anne disagreed because she felt that customers would not notice a 10%

price decrease. She felt that if prices went down 10% that at most the

average number of items purchased would rise by 12%. Under this

scenario the cost of goods sold as a percent of sales would be (.62/.9) or

68.89% and the gross margin percent would be 31.11% (100% - 68.89%).

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (10% price reduction and 12% or 20% increase

in average number of items purchased) in the simulation. If the formula

or number does not change from the baseline, you can simply copy these

formulas or numbers into the empty cells under the various scenarios. Be

sure to save your work and print a copy once you are satisfied with its

correctness. After you complete your simulation there are two questions

you need to answer. These can be answered by typing your responses

below the questions, saving your work, printing a copy and handing it in

to the instructor if required

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EXERCISE TEN-B

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchs 5

total items prchs 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

2. What other considerations should be taken into account other than the

impact on closure of the proposed price decrease? Why are these other

considerations important?

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PHASE FIVE

EXERCISE ELEVEN-A

page advertisement in the Saturday newspaper, a weekly one-inch

advertisement in two church bulletins, a full-page advertisement in the

high school yearbook, sponsorship of a float in the Fourth of July parade,

and sponsorship of the local high school football and basketball teams.

The local newspaper advertising is $300 per week, the advertisements in

the church bulletins is $1000 per year, the ad in the yearbook is $500,

the parade float is $2500, and the team sponsorships are $2500 each. In

addition, there are a variety of other advertising and promotions that

vary each year but generally total less than $20,000 annually. Advertising

has been approximately 3.2% of sales.

Currently all of the advertising/promotion has a long-run objective

of improving store performance by promoting the store image. Anne

believes that the advertising expenditures need to have a short-term

objective such as attracting new customers and increasing patronage

from existing customers. She also believes that The House needs to

spend a minimum of $1,500 per month with expenditures concentrated

during periods of peak demand (March-May and November-December).

Anne has recommended the following advertising expenditures:

January and February = $1,500, March = $2,000, April and May = $3,000,

June = $2,000, July-September = $1,500, October = $4,000, November -

December = $7,000. Furthermore, 40% would be spent on the local AM

Radio station and 60% on the local newspaper. All advertising will feature

items on sale. As a result, Anne believes that penetration will rise to 68%

and the average number of items purchased will rise from 5.0 to 5.2 or

5.3. Since advertising will be directed at the local trade area, she does

not expect the trade radius to increase.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (average items 5.2 or 5.3) in the simulation. If

the formula or number does not change from the baseline, you can

simply copy these formulas or numbers into the empty cells under the

various scenarios. Be sure to save your work and print a copy once you

are satisfied with its correctness. After you complete your simulation

there are two questions you need to answer. These can be answered by

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typing your responses below the questions, saving your work, printing a

copy, and handing it in to the instructor if required

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EXERCISE ELEVEN-A

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

short-term sales objectives to the long run objective of store image

enhancement? How might these problems be overcome?

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PHASE FIVE

EXERCISE ELEVEN-B

Hamilton where The House is located. Generally people in these towns

travel regularly to Hamilton to shop at Wal*Mart. These towns are within

a 15-mile radius and range in size from 520 to 1650 households.

However, five miles to the east is a town of 610 households and five

miles to the west is a town of 642 households. Fred believes that The

House should begin an advertising program in each of these towns. Each

town has a small weekly newspaper which could be used to reach these

geographic markets. With this expanded trade area of five miles, the

total households of the trade area would be 9,139, (7,887 + 610 + 642).

The density of households in this five-mile circular trade area is 116.315

households per square mile.

The annual cost of advertising twice a month in these two weekly

newspapers would be $7600. With this advertising expenditure, Fred

estimates that penetration would decline to 62% and average shopping

frequency would drop to 7.5 times. This would occur because of the

larger size of the trade area and the inherent increased travel time for

the typical customer. However, with the larger number of households to

serve, he believes that such an advertising strategy would be profitable.

Anne also believes that such an approach would be valuable but wonders

if they shouldn't consider what would happen if average shopping

frequency declined to 7.2 times.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (average shopping frequency = 7.5 or 7.2) in the

simulation. If the formula or number does not change from the baseline,

you can simply copy these formulas or numbers into the empty cells

under the various scenarios. Be sure to save your work and print a copy

once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy, and handing it in to the instructor if required

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EXERCISE ELEVEN-B

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

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2. How might other promotional efforts be tied into this advertising

strategy?

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PHASE FIVE

EXERCISE TWELVE-A

development program on high performance retailing. One of the topics

she was especially interested in was how to design a store's environment

to enhance the store's image. She was considering a major remodeling of

The House. Anne envisioned three major changes. First she felt that the

orange carpeting was inconsistent with the store's image and usually

conflicted with the apparel being displayed. Therefore, she was

considering installing new flooring and freshly painting the walls and

ceiling. The cost of the flooring and painting would be $10,000. Next, she

wanted to install a C.D. sound system which consisted of a six-disc

changer, amplifier, and four speakers in each of the four corners of the

store. She also wanted to purchase 30 recordings of classical and big

band music. The cost of this system would be $2800. Third, she wanted

an entire new set of fixtures and tables upon which to display the

merchandise. A local carpenter has given her an estimate to custom build

these fixtures. The cost would be $24,000. These improvements would be

expected to have a five-year life and, thus, the $36,800 written off over

the next five years would be $7360 per year.

When Anne told Fred of her planned changes he balked at the

$36,800 in expenditures. He couldn't understand how such changes

would have any influence on store performance. He was very clear that

these changes would not bring more customers into the store. Anne

conceded on this point but argued that the impact would be felt through

a higher closure. Because people would feel more comfortable in the

store and probably browse more, she felt that closure would rise. The

instructor in the course she attended mentioned that a remodeling effort,

if properly conducted, would increase sales by 20-30%. Nonetheless,

Anne was very uncertain on what the impact on closure would be and

thus her conservative estimate was that it might only increase to 65%,

however, her optimistic estimate was that closure would rise to 70%.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (closure = 65% or 70%) in the simulation. If the

formula or number does not change from the baseline, you can simply

copy these formulas or numbers into the empty cells under the various

scenarios. HINT--Treat the amount of the remodeling as a

permanent increase in assets even though these assets will be

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depreciated over five years. Be sure to save your work and print a

copy once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy, and handing it in to the instructor if required

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EXERCISE TWELVE-A

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

1. What is the financial impact of the store layout and design strategy?

2. Do you see any ways that The House could reduce the risk of this store

layout and design strategy? Please explain.

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PHASE FIVE

EXERCISE TWELVE-B

Anne contacted Larry Jones, the instructor she had in the "High

Performance Retailing" executive development seminar. Larry lived 150

miles north and agreed to drive down to visit Anne and Fred on Friday

morning to hear about their plans. He said he would like to visit with

them for about an hour and also spend some time visiting other stores on

the Town Square and driving around town. He hoped to accomplish all of

this in 4-5 hours so he could leave town by 4 p.m. Anne and Fred agreed

to pay him $2000 for his services and billed this expense to the year end

2001 financial statements.

Larry was very impressed with the plans that Anne had developed.

Based on his prior experience and the target market of The House, he

estimated that closure would rise to 70%. He explained that they were

correct in assuming that all of the benefit of the remodeling would occur

once people had entered the store. However, he did believe, based on

the large number of people visiting the Town Square to go to the U.S.

Post Office, local government offices, and obtain other services, that if

they could also remodel the exterior of the store that penetration could

be expected to rise. Also he felt the dark brown wooden storefront

projected an image that was inconsistent with the remodeled interior. He

suggested that they use a red brick front, utilizing old or used brick, and

that a new sign be installed to call attention to the store. With these

additional changes he felt that not only would closure rise, but that

penetration would easily rise to 67% or 68%. Larry also mentioned that if

other businesses on the town square could remodel their store or building

exteriors, that more people might find it pleasant to visit the Town

Square.

After Larry left town, Anne called their landlord, Bill Henderson,

who was also Anne's father. She told him of her plans to remodel the

store and suggested that if Fred and her do the interior remodeling, that

Bill should pay for the exterior remodeling. Anne had obtained a cost

estimate of $15,000 which she mentioned to her dad. After some

negotiating, Bill Henderson and Anne decided to split the cost of the

exterior remodeling. Like the interior remodeling, they decided to write

this expenditure off over 60 months.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

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under the two scenarios (penetration = 67% or 68%) in the simulation. If

the formula or number does not change from the baseline, you can

simply copy these formulas or numbers into the empty cells under the

various scenarios. HINT--Treat the amount of the exterior

remodeling as a permanent increase in assets even though these

assets will be depreciated over five years. Also be sure to include

the interior remodeling into the simulation model (see Exercise

12-a). Be sure to save your work and print a copy once you are satisfied

with its correctness. After you complete your simulation there are two

questions you need to answer. These can be answered by typing your

responses below the questions, saving your work, printing a copy, and

handing it in to the instructor if required

EXERCISE TWELVE-B

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable operating cost $148,415

fixed operating cost $307,680

total operating cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

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2. Are there any other things that could be done with The House to

further enhance the store's atmosphere?

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PHASE FIVE

EXERCISE THIRTEEN-A

Several years before Bill Henderson sold The House to Anne and

Fred he started maintaining a database on regular customers. This

database revealed that about 60% of the business is from a core of 900

households. Many of these households are two income households where

both husband and wife work full time. These individuals are always

pressed for time and put off shopping until the last moment, however,

when they purchase, their average transaction size is $181. Fred and

Anne both believe that these customers would be very supportive of a

personal shopping service.

Fred and Anne believe that as part of their database they could

record the birth dates, anniversaries, and other significant dates for all

family members, relatives, and significant friends. They could then offer

to customers a personal shopping service where gifts for friends could be

purchased and the apparel needs of the household could be handled.

Fred and Anne are quite uncertain about the impact of this personal

shopping service. They believe that it might increase total transactions

by 1,000 to 1,600 per year and that the average transaction size for

these transactions will be $65 (excluding delivery charges). To do a

promotional mailing to the 900 target households with an enclosed

questionnaire and participation form would cost $2,000. They anticipate

sending out this questionnaire annually so customers can provide

information to update the database. Furthermore, they plan to spend

$5,000 annually promoting this new shopping service.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (1,000 or 1,600 personal shopping transactions)

in the simulation. If the formula or number does not change from the

baseline, you can simply copy these formulas or numbers into the empty

cells under the various scenarios. Be sure to save your work and print a

copy once you are satisfied with its correctness. After you complete your

simulation there are two questions you need to answer. These can be

answered by typing your responses below the questions, saving your

work, printing a copy, and handing it in to the instructor if required.

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EXERCISE THIRTEEN-A

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

prs shopping trans $0.00

av trans prs shop tran $0.00

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed operating cost $307,680

total operating cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

might become more profitable?

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PHASE FIVE

EXERCISE THIRTEEN-B

The House employs several clerks that work full or part-time while

either Anne or Fred are in the store. Neither Fred, Anne, nor the clerks

attempt to do any selling. If someone needs help, they are there to assist

but otherwise no type of selling occurs. Fred recently read an article in a

trade publication that emphasized the role of order getters vs. order

takers. Fred initially thought that given the low average item price in the

store that any selling effort would not be worth the effort or would be

ineffective. However, one of the things the article emphasized was the

role of suggestion selling. He thought this had some real possibility. For

example, if a customer bought a shirt the clerk could suggest a tie or

slacks. After Fred visited with Anne about his ideas she mentioned that

one of the reasons that closure might be low (62%) was because of

virtually no selling effort in the store. She argued that by being a bit

more aggressive, but still polite and courteous, that the closure rate

would rise.

Fred became aware of a retail personal selling seminar being

offered in New York. This course was tied in with one of the major apparel

shows and was a day in length and cost $395 per person. For an

additional $100 each participant would receive a weekly newsletter with

helpful selling tips. The course was taught by Martha Hernandez, who

had 20 years experience as an apparel buyer, salesperson, and business

owner. Martha had launched a chain of 12 womenswear stores in the late

1970s, which she subsequently sold for $6.5 million.

Fred and Anne decided to both attend and to take their four full-

time clerks. The total cost including travel, registration, lodging, and the

one-year subscription for the weekly newsletter was $12,000. Based on

the brochures promoting the program and some of his own analysis and

projections, Bill set a goal of increasing closure to 68% and the average

number of items purchased to 5.3. He also thought that a possibility

existed of closure reaching 70%.

The spreadsheet you will need to run this simulation is attached.

You will need to double click on this spreadsheet which will bring up the

Excel software. Please note that all rows and columns have been labeled,

however, you need to enter the formula for each row item that occurs

under the two scenarios (closure = 68% and 70%) in the simulation. If

the formula or number does not change from the baseline, you can

simply copy these formulas or numbers into the empty cells under the

various scenarios. Be sure to save your work and print a copy once you

are satisfied with its correctness. After you complete your simulation

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there are two questions you need to answer. These can be answered by

typing your responses below the questions, saving your work, printing a

copy, and handing it in to the instructor if required.

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EXERCISE THIRTEEN-B

trade radius 3

population density 278.833

market coverage 7887

penetration 0.65

avg shopping frequency 7.8

traffic 39987

closure 0.62

transactions 24792

avg no. of items prchsd 5

total items prchsd 123960

average item price $10.69

average tranaction size $53.45

net sales $1,325,131

cost of mdse sold $821,581

gross margin $503,550

variable op cost $148,415

fixed op cost $307,680

total op cost $456,095

net profit $47,455

net profit margin 3.58%

asset turnover 2.265

return on assets 8.11%

QUESTIONS

1. Should Fred and Anne follow through with the personal selling seminar

as planned? Why?

2. Are there any other suggestions you have to improve the personal

selling strategy of The House?

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South-Western items and derived items copyright © 2002 by South-

Western

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