As a manager or business owner, you will face many difficult decisions. Review the following scenario for
Question:
As a manager or business owner, you will face many difficult decisions. Review the following scenario for a major specialty retailer based in the United States. The jewelry department had net sales of $1 million. The direct expenses during the period under consideration were:
Expense Category | Expense Amount |
Buying salaries | $125,000 |
Selling salaries | $275,000 |
Advertising | $90,000 |
Receiving and marking | $15,000 |
Wrapping and packing | $10,000 |
The gross margin achieved during this time was 48.0%. After reviewing this performance, management decided that expenses must be reduced. The manager was given the choice of either (1) reducing the advertising budget to a maximum of $50,000 or (2) eliminating a salesperson, which would reduce selling salaries by $50,000.
Discuss which plan of action you would choose and why. Explore the two options mathematically, and then state your choice. Justify your decision. Discuss the impact your strategy will have on net profit.
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim