A Retail Store Sells a Popular Cosmetic Called Rochelle and the Store

question 74

Multiple Choice

A retail store sells a popular cosmetic called Rochelle and the store manager is given $100,000 by the corporate office to improve store performance any way she thinks best. The "base case" information is a price of $30 per bottle, a contribution margin of 0.50, a customer defection rate of 17%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either (a) increase the contribution margin to 0.58 or (b) reduce the customer defection rate to 15% or (c) increase the repurchase frequency to 4 times per year, what is the best way to spend these improvement funds by answering the next two questions? (Assume all other variables remain at the base case level for each of the three improvement options.) VLC = P*CM*RF*BLC
You may want to use the table below to help organize your computations and answer.
$\begin{array}{|c|c|c|c|c|}\hline \begin{array}{c}\text { Price \& } \\\text { Improvement } \\\text { Option }\end{array} & \begin{array}{c}\text { Contribution } \\\text { Margin }\end{array} & \begin{array}{c}\text { Repurchase } \\\text { Frequency }\end{array} & \text { Defection Rate }&\text { VLV in } \$ \\\hline \$ 30 \text { (base case) } & 0.50 & 3 & 17 \%& \\\hline \$ 30 \text { (option a) } & & & \\\hline \$ 30 \text { (option b) } & & & \\\hline \$ 30 \text { (option c) } & & &\\\hline\end{array}$
-Which of the following is the best way to use the $100,000 in improvement funds?

• A) Do nothing (stay with base case).
• B) Improve option (a)-increase the contribution margin to 0.58.
• C) Improve option (b)-reduce the defection rate to 15%.
• D) Improve option (c)-increase the repurchase frequency to 4.
• E) Two improvement options have equal VLC dollars, so split the funds between the two tied improvement options.

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Definitions:

Arbitragers

Individuals or entities that attempt to profit from price differences of the same or similar financial instruments, on different markets or in different forms.

Market Inefficiency

A condition where all available information is not fully incorporated into asset prices, leading to opportunities for higher returns.

Siamese Twin Companies

Companies listed in different countries that share an operational business but trade separately on the stock exchange.

Equity Carve-Outs

A type of corporate restructuring where a company creates a new, independent company by selling or distributing new shares of its existing division or subsidiary.