A Retail Store Sells a Popular Cosmetic Called Anya, and the Store

question 33

Essay

A retail store sells a popular cosmetic called Anya, 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 $50 per bottle, a contribution margin of 0.50, a customer defection rate of 25%, and a repurchase frequency of 3 times a year. If these improvement funds could be used to either increase the contribution margin to 0.58 or reduce the customer defection rate to 15% or increase the repurchase frequency to 4 times per year, what is the best way to spend these funds? (Assume all other variables remain at the base case level for each improvement option.)
You may want to use the table below to help organize your computations and answer. $\begin{array}{|c|c|c|c|c|c|}\hline&&\text { Contribution }&\text { Repurchase }\\\text { Option } & \underline{\text { Price }}&\text { Margin }&\text { Frequency }& \text { Defection Rate } &\underline{\text { VLC in } \$}\\\hline \begin{array}{l}\text { Base } \\\text { case }\end{array} & \$ 50 & 0.50 & 3 & 25 \% \\\hline \text { (a) } & \$ 50 & 0.58 & 3 & 25 \% & \\\hline \text { (b) } & \$ 50 & 0.50 & 3 & 15 \% & \\\hline \text { (c) } & \$ 50 & 0.50 & 4 & 25 \% & \\\hline\end{array}$ Note: BLC is 1/0.25 = 4 years and 1/0.15 = 6.67 years.

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Definitions:

Current Liabilities

Financial obligations a company needs to settle within one year.

Note Payable

A financial obligation represented by a written promissory note which specifies the amount and terms under which the money must be repaid.

Net Working Capital

A financial metric representing the difference between a company's current assets and current liabilities.

Change in Net Working Capital

The difference between the current assets and current liabilities from one period to the next, reflecting changes in liquidity and operational efficiency.