"understanding a retail enterprise using spreadsheet analysis" prepared to accompany

The House

"Understanding A Retail Enterprise Using Spreadsheet Analysis"

Prepared To Accompany

Retailing, Fifth Edition by

Robert F. LuschUniversity of Oklahoma

Patrick DunneTexas Tech University

Copyright © 2005 by South-Western

All right reserved. No part of this product may be reproduced, 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

The House is a spreadsheet analysis of the financial performance of 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.

The models can be used to further acquaint you with how 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

Spreadsheet analysis, often referred to as worksheet analysis, is a 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

A cell is the intersection of a column and row. 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

Data is entered into a spreadsheet by highlighting the cell the data will be entered into and then typing in the numerical data. Only numerical data can be input.

Entering Formulas

Typically a formula is entered by highlighting the cell in the 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

In The House whenever you have a percent to enter into the 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

Hamilton is centrally located near several other communities. The 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

The House has 40% of its sales in menswear, 35% in womenswear, 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

The retail environment of Hamilton is typical of small college towns. 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

You will probably find it helpful to reread this brief description of 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

The problems you will work in phase one relate to part one--"Introduction To Retailing" of Retailing (2002) by Dunne, Lusch and Griffith. For phase one you need to understand the following concepts:

Net Sales is the dollar value of annual sales.

Cost of Merchandise Sold is the monetary amount owed or 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.

Gross Margin is the Net Sales minus the Cost of Merchandise Sold. Gross margin percent is the Gross Margin as a percent of sales.

Variable Operating Cost are costs that increase 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.

Fixed Operating Costs are the costs the retailer incurs regardless of the level of sales. Common fixed costs in retailing are insurance, interest on debt, certain salaries, and rent.

Total Operating Cost is the sum of fixed operating and variable operating costs.

Net Profit is the amount remaining after total 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 you can round off your answer to the nearest one-hundredth of a decimal

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(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.

Net Profit Margin is the ratio of net profits divided by net 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.

Asset Turnover is the ratio of net sales divided by total assets. 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 net profit divided by total assets. If the 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:

(net profit/net sales) * (net sales/total assets) = (net profit/total assets)

OR

(net profit margin) * (asset turnover) = (return on assets)

The simulation model you will be working with in phase one will look like the following:

SAMPLE SPREADSHEET

PHASE ONE

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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 ONEEXERCISE ONE-A

The Negative Impact of External Forces onStore Performance

Anne and Fred just learned that Creative Ceramics, a producer of 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 dropnet sales $1,325,132cost of mdse sold $821,582gross margin $503,550var operating cost $148,415fixed operating cost $307,680total operating cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Which financial ratio was most impacted by the decline in population? Why?

2. Which costs are affected by the sales decline? Why?

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PHASE ONEEXERCISE ONE-B

The Positive Impact of External Forces on 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

Baseline Model 1% sales increase1.5% sales increase2% sales increase$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

1. Which financial ratio was most impacted by the reduction in

competition? Why?

2. Which costs are affected by the sales increase? Why?

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PHASE ONEEXERCISE TWO-A

The Impact of Different Marketing and FinancialStrategies 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

Baseline Model Expand Store Hours Direct Mail Catalog$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 ONEEXERCISE TWO-B

The Impact of Different Marketing and FinancialStrategies on Store Performance

The House is considering handling a line of higher priced women's 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

Baseline Model Fin Inv Internally Fin Inv Externallynet sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Which alternative should be used to finance the increased inventory 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:

market coverage is the number of households residing in the trade area of the retail store; this is also often called the number of prospects.

penetration level is the percent of households residing in the trade area of the retail store who visit the store within a year.

average shopping frequency is the average number of times a year that a household visits the store.

traffic is the total number of household visits to the store annually.

closure is the percent of households who visit the store that end up purchasing.

transactions are the annual number of customers who make a purchase.

average transaction size is the average dollar value of a transaction

You also need to understand the following relationships between the preceding concepts:

traffic = (market coverage) * (penetration level) * (average shopping frequency)

transactions = (traffic) * (closure)

net sales = (transactions) * (average transaction size)

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

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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 SPREADSHEETPHASE TWO

Baseline Model Model-A Model-Bmarket coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

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PHASE TWOEXERCISE THREE-A

The Impact of Improved Demographics onStore Performance

Anne and Fred have merchandised The House to appeal to a broad 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

Baseline Model Improved Mkt Coveragemarket coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Why did a modest increase in market coverage have such a significant influence on store performance?

2. Should The House attempt to appeal more to college students and faculty? Why or why not?

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PHASE TWOEXERCISE THREE-B

The Impact of Altering theTarget 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

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transaction size would 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 8.0market coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. What is the impact of the College Shop strategy on traffic and transactions? Why is traffic so important in retailing?

2. Why does the net profit margin improve so dramatically?

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PHASE TWOEXERCISE FOUR-A

The Impact of Increased Competition From Dollar General 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 = 7.0market coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Why did the drop in average shopping frequency have such a dramatic impact on store performance?

2. Should The House attempt to take a counter competitive action? If so what do you recommend?

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PHASE TWOEXERCISE FOUR-B

The Impact of Increased Competition fromDirect Mail Retailers on Store Performance

Recently the residents of Hamilton have been receiving an 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 7887penetration level 0.65avg shop frequency 7.8traffic 39987closure rate 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Which financial ratios are affected by this increased competition? Why?

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

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PHASE TWO

EXERCISE FIVE-A

Evaluating Alternative Distribution Channels

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

Baseline Model Use New Wholesalermarket coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. What is the financial impact of switching to the new wholesaler?

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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 TWOEXERCISE FIVE-B

The Impact of New Merchandise Supply Sources

Recently, while attending a state-wide Chamber of Commerce 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

Baseline Model Penetration 67% Penetration 68%market coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure rate 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. What is the financial impact of developing and marketing the private brand of women's and girl's apparel?

2. What other advantages might accrue to The House as a result of developing a private brand? How might these impact other variables in the simulation model?

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PHASE TWOEXERCISE SIX-A

The Impact of Changing Local Legislationon 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

Baseline Model Leasehold Expense New Leasemarket coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure rate 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. What is the financial impact of the different lease options?

2. If the leasehold option is pursued, what other considerations need to be made?

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PHASE TWOEXERCISE SIX-B

The Impact of a National Sales Tax onStore Performance

Anne and Fred just learned that the federal government is 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

Baseline Model 1% Natl Sales Tax2% Natl Sales Taxmarket coverage 7887penetration level 0.65avg shopping frequency 7.8traffic 39987closure rate 0.62transactions 24792avg transaction size $53.45net sales $1,325,132cost of mdse sold $821,582gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return 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

The problems you will work in phase three relate to Part 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:

trade area is the geographic area from which a retailer draws 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.

population density is the number of people or households per square mile within the store's trade area. In this simulation we use households as the measure of population density.

If one combines the concept of market coverage, which we introduced in phase two, with the preceding concepts, one can obtain the following relationship.

market coverage = (22/7) * (trade radius squared) * (population 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

Baseline Model Model-A Model-Btrade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

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PHASE THREEEXERCISE SEVEN-A

Evaluating a New Location for The House

Currently The House is located on the Town Square and draws 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

Year One Year Twotrade radiuspopulation densitymarket coveragepenetration levelavg shopping frquencytrafficclosuretransactionsavg transaction sizenet salescost of mdse soldgross marginvaraible op costfixed op costtotal op costnet profitnet profit marginasset turnoverreturn on assets

QUESTIONS

1. Is the proposed new location for The House economically viable? 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 THREEEXERCISE SEVEN-B

The Impact of a Second Location on the Existing Location

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

Baseline Model Cannibilizationtrade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg transaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return 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.

planned sales for the month = (planned sales percentage for the month)*(planned total sales)

planned BOM stock for the month. There are three methods we will deal with:

1. the stock-to-sales method. The planned BOM stock for 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

3. the percentage variation method. The planned BOM stock for the month = (average stock for season)*(1/2)[1+(planned sales for the month/average monthly sales)]

planned retail reductions for the month = (planned sales for the month)*(planned retail reduction percentage for the month)

planned EOM stock for the month = (planned BOM stock for the following month)

planned purchases at retail for the month = (planned sales 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)

planned initial markup for the month = (planned purchases at retail for the month) - (planned purchases at cost for the month)

planned gross margin for the month = (planned initial markup for the month) - (planned retail reductions for the month)

The merchandise budget for exercises 8a and 8b will be as follows. For 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.

SAMPLESIX-MONTH MERCHANDISE BUDGET

Feb March April May June July TotalPlannedBOM StockPlannedSales

PlannedRetail Re- ductionsPlannedEOMStockPlannedPurchasesat RetailPlannedPurchasesat CostPlannedInitialMarkupPlannedGrossMarginPlanned BOM Stock-to-SalesRatio

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PlannedSalesPercentagePlannedRetailReductionPercentage

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PHASE FOUREXERCISE EIGHT-A

Developing a Six Month Merchandise BudgetUsing BOM Stock to Sales Method

Anne Harris is in the process of developing the merchandise budget 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)

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




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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)



planned BOM stock-to-sales ratio = 5.9 for February, 5.2 for March, 5.0 for April and May, 4.0 for June and 5.0 for July.

planned sales percentage by month = February 9%, March 11%, April 14%, May 21%, June 22%, July 23%.

planned retail reduction percentage by month = 5% for February and March, 8% for April and May, and 12% for June and July.

EXERCISE EIGHT-A

Feb-98 Mar-98 Apr-98 May-98 J un-98 J ul-98 TotalPlan BOM StockPlan SalesPlan Rtl ReductionsPlan EOM StockPlan Purch @ RtlPlan Purch @ CostPlan Initial MarkupPlan Gross MarginPlan BOM Stk to SalesPlan Sales %Plan Rtl Reduction %

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PHASE FOUREXERCISE EIGHT-B

Developing a Six Month Merchandise BudgetBOM Stock to Sales Method

Anne Harris is in the process of developing the merchandise budget 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.


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





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planned BOM stock-to-sales ratio = 6.1 for February, 5.3 for March, 5.0 for April and May, 4.1 for June, and 5.2 for July.



EXERCISE EIGHT-B

Feb-98 Mar-98 Apr-98 May-98 J un-98 J ul-98 TotalPlan BOM StockPlan SalesPlan Rtl ReductionsPlan EOM StockPlan Purch @ RtlPlan Purch @ CostPlan Initial MarkupPlan Gross MarginPlan BOM Stk to SalesPlan Sales %Plan Rtl Reduction %

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PHASE FOUREXERCISE NINE-A

Developing a Six Month Merchandise BudgetUsing the Basic Stock Method

Anne Harris is in the process of developing the merchandise budget 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.


planned BOM stock for the month = basic stock + planned monthly sales

basic stock = average stock for the season - average monthly sales for the season

average monthly sales for the season = total planned 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



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EXERCISE NINE-A

Feb-98 Mar-98 Apr-98 May J un-98 J ul-98 TotalPlan BOM StockBasic StockAvg Monthly SalesAvg Stk for SeasonPlan SalesPlan Rtl ReductionsPlan EOM StockPlan Purch at RtlPlan Purch at CostPlan Initial MarkupPlan Gross MarginPlan Sales %Plan Rtl Reductn %

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PHASE FOUREXERCISE NINE-B

Developing a Six Month Merchandise BudgetUsing the Percentage Variation Method

Anne Harris is in the process of developing the merchandise budget 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.


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

average monthly sales for the season = total planned 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




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EXERCISE NINE-B

Feb-98 Mar-98 Apr-98 May-98 J un-98 J ul-98 TotalPlan BOM StockAvg Monthly SalesAvg Stck for SeasonPlan SalesPlan Rtl ReductionsPlan EOM StockPlan Purch at RtlPlan Purch at CostPlan Initial MarkupPlan Gross MarginPlan 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:

average number of items purchased is the number of items the typical customer purchases on a visit to the store

average item price is the average price which a customer pays for an item purchased at the store

total items purchased is the total number of items that are sold by the store over a one year period

Utilizing the preceding concepts coupled with the concept of total transactions we can establish the following relationships.

average transaction size = (average number of items purchased) * ( average item price)

average number of items purchased = (total items purchased)/(total transactions)

The spreadsheet model you will be working with in the phase five exercises is as follows:

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SAMPLE SPREADSHEETPHASE FIVE

Baseline Model Model-A Model-Btrade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items purchsed 5total items purchased 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable operating cost $148,415fixed operating cost $307,680total operating cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

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PHASE FIVEEXERCISE TEN-A

Evaluating the Impact of a Price Increase

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 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items purchs 5total items purchs 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Should prices be raised by 10%? Explain.

2. Are there other parameters in the model that might be influenced by the price increase? Explain.

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PHASE FIVEEXERCISE TEN-B

Evaluating the Impact of a Price Decrease

Fred mentioned to Anne if a price increase of 10% were to be 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

Baseline Model Av Itms Prchs Up 12% Av Itms Prchs Up 20%trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchs 5total items prchs 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Evaluate the financial impact of the proposed price decrease.

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 FIVEEXERCISE ELEVEN-A

Evaluating the Impact of a New Advertising Campaign

The advertising and promotion for The House consists of a half-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

Baseline Model av itms prchs = 5.2 av itms prchs = 5.3trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Should The House change the advertising strategy? Explain.

2. Are there any problems in switching the advertising program from short-term sales objectives to the long run objective of store image enhancement? How might these problems be overcome?

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PHASE FIVEEXERCISE ELEVEN-B

Using Advertising to Expand the Trade Area

There are five smaller towns that surround the community of 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

Baseline Model Av Shopping Fqcy 7.5 Av Shopping Fqcy 7.3trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. What is the financial impact of the proposed advertising strategy?

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

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PHASE FIVEEXERCISE TWELVE-A

The Impact of a Store Layout and Design Strategy

Anne just returned from attending a three-day executive 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

Baseline Model Closure = 65% Closure = 70%trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return 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 FIVEEXERCISE TWELVE-B

A Further Evaluation of a Store Layout and Design Strategy

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 under the two scenarios (penetration = 67% or 68%) in the

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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

Baseline Model Penetration 67% Penetration 68%trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable operating cost $148,415fixed operating cost $307,680total operating cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Should the recommendations of Larry Jones be acted upon?

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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 FIVEEXERCISE THIRTEEN-A

Evaluating the Impact of a Personal Shopping Service

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

Baseline Model 1000 Prs Shp 1600 Prs Shptrade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45prs shopping trans $0.00av trans prs shop tran $0.00net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed operating cost $307,680total operating cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return on assets 8.11%

QUESTIONS

1. Should The House institute a personal shopping service?

2. Do you have any suggestions on how the personal shopping service might become more profitable?

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PHASE FIVEEXERCISE THIRTEEN-B

Evaluating a Salesforce Training Program

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

Baseline Model Closure 68% Closure 70%trade radius 3population density 278.833market coverage 7887penetration 0.65avg shopping frequency 7.8traffic 39987closure 0.62transactions 24792avg no. of items prchsd 5total items prchsd 123960average item price $10.69average tranaction size $53.45net sales $1,325,131cost of mdse sold $821,581gross margin $503,550variable op cost $148,415fixed op cost $307,680total op cost $456,095net profit $47,455net profit margin 3.58%asset turnover 2.265return 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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