BA2002-Managerial Accounting Chapter 6-CVP in a Retail organisation - Francesca's Case Part I Francesca runs a...

 

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BA2002-Managerial Accounting Chapter 6-CVP in a Retail organisation - Francesca's Case Part I Francesca runs a small high street children clothing shop in affluent area. The shop has several departments. The largest department by sales volume is children clothing. She developed a successful business model of buying and selling 'end of the line' high quality children attire from large department stores and high-end brands (i.e. last season unsold inventory). In addition, there is a toy department and a coffee shop, she also runs educational activities and events. These streams of revenue complement each other. As a warm-up exercise: Classify each of the following costs as fixed or variable (FC/VC) with respect to the volume. No need to include this in your slides - see below. Costs: Monthly rent Electricity costs (single bill covers entire shop! Clothing and toys purchased for resale Leasing of computer software used to scan items in the till and stock keeping purposes Monthly fee for accounting service Cost of the clothing catalogues offered to the clients (one per dient) Cost of advertising at local newspaper Business insurance policy Cost of training course for a part-time shop assistant Fixed Variable Part II - Setting up a compensation scheme for a new shop. Francesca is considering opening another shop. Francesca found suitable premises on a high street in a neighbouring town. This is a new market for her business, where the population has higher disposal income. At this stage Francesca thinks that the sales volume can go as high as 400 units or as low as 200 units per month. For simplicity she assumes that the average selling price will be $70, total variable costs excluding, if any, the sales commission will account for 30% of the sales. The fixed costs in this shop (in addition to the salary stated below) will be $4,000 per month. Francesca needs to decide on the compensation scheme for the new team. She has two options: Option A: to pay a basic level fixed salary of $2,000 per month plus a commission of 10% of the sales revenue. Option B: to pay a straight fixed salary, this will amount to $4,600 in total per month. Required: Evaluate the two options and advise Francesca which option to take (based on financial and non-financial factors). Hint: compete Connect Ch 6-2 Before Class assignments for ideas. Part A: Individually, each student is required to prepare the following calculations in Excel: 1) Income statement in contribution margin format and calculate the profit generated by both options based on sale volumes of 200 and 400 units per month at the new shop. Calculate BEP, margin of safety for each option. Use the results of the calculation to support your advice and decision. 2) Identify 3-5 key risks that Francesca should consider when setting up a new shop. For inspiration, you can use Porter's Value chain analysis to frame your thinking and focus your discussion. Part B: In a group: (a) Set up meeting (s) In a group and: (b) Compare and discuss results of your individual calculations copy and paste one of your calculations into the 1st slide. You can add any additional calculations to support your decision. (c) Discuss the most significant risks in Francesca's business model and its key success factors? Prepare 2 Power point slide portraying the key risks you have identified (bullet points, diagram, table - wherever your creativity will take you. d) Evaluate the two options and advise Francesca which option to take. Justify your decision with 3- 5 key points (i.e. explain why you reached your conclusion) - prepare 3rd slide with your decision and key arguments. Be ready to present (informally) and discuss your findings if I call on you. Email me your slides (one per group) by 8 pm on Wednesday, October 7, 2020. PS: Slide 2 & 3 can be merged in one. Accueil Insertion Dessin Mise en page » Dites-le-nous >>> Presse-papiers 15 1 Francesca's Case: 2 Group & Names: 3 4 5 6 Sales Revenue 7 Variable Costs 4 x 8 9 A Sales Commission Total Variable Costs 10 Contribution Margin 11 Fixed Salary 12 Other Fixed Costs 13 Total Fixed Costs 14 Net Operating Income A. Police 15 16 Break-even point, units 17 Break-even point, $ 34 35 18 Margin of Safety, units. 19 Margin of Safety, $ 36 37 38 39 40 41 20 Margin of Safety, % 21 22 23 24 25 26 27 28 29 30 31 32 33 Sheet1 fx Alignement Units + B Cost per unit %* Numérique C Option A In Total 200 D 400 Mise en forme conditionnelle Mettre sous forme de tableau Styles de cellule E F Cost per unit G Partager Option B In Total 200 Cellule H 400 BA2002-Managerial Accounting Chapter 6-CVP in a Retail organisation - Francesca's Case Part I Francesca runs a small high street children clothing shop in affluent area. The shop has several departments. The largest department by sales volume is children clothing. She developed a successful business model of buying and selling 'end of the line' high quality children attire from large department stores and high-end brands (i.e. last season unsold inventory). In addition, there is a toy department and a coffee shop, she also runs educational activities and events. These streams of revenue complement each other. As a warm-up exercise: Classify each of the following costs as fixed or variable (FC/VC) with respect to the volume. No need to include this in your slides - see below. Costs: Monthly rent Electricity costs (single bill covers entire shop! Clothing and toys purchased for resale Leasing of computer software used to scan items in the till and stock keeping purposes Monthly fee for accounting service Cost of the clothing catalogues offered to the clients (one per dient) Cost of advertising at local newspaper Business insurance policy Cost of training course for a part-time shop assistant Fixed Variable Part II - Setting up a compensation scheme for a new shop. Francesca is considering opening another shop. Francesca found suitable premises on a high street in a neighbouring town. This is a new market for her business, where the population has higher disposal income. At this stage Francesca thinks that the sales volume can go as high as 400 units or as low as 200 units per month. For simplicity she assumes that the average selling price will be $70, total variable costs excluding, if any, the sales commission will account for 30% of the sales. The fixed costs in this shop (in addition to the salary stated below) will be $4,000 per month. Francesca needs to decide on the compensation scheme for the new team. She has two options: Option A: to pay a basic level fixed salary of $2,000 per month plus a commission of 10% of the sales revenue. Option B: to pay a straight fixed salary, this will amount to $4,600 in total per month. Required: Evaluate the two options and advise Francesca which option to take (based on financial and non-financial factors). Hint: compete Connect Ch 6-2 Before Class assignments for ideas. Part A: Individually, each student is required to prepare the following calculations in Excel: 1) Income statement in contribution margin format and calculate the profit generated by both options based on sale volumes of 200 and 400 units per month at the new shop. Calculate BEP, margin of safety for each option. Use the results of the calculation to support your advice and decision. 2) Identify 3-5 key risks that Francesca should consider when setting up a new shop. For inspiration, you can use Porter's Value chain analysis to frame your thinking and focus your discussion. Part B: In a group: (a) Set up meeting (s) In a group and: (b) Compare and discuss results of your individual calculations copy and paste one of your calculations into the 1st slide. You can add any additional calculations to support your decision. (c) Discuss the most significant risks in Francesca's business model and its key success factors? Prepare 2 Power point slide portraying the key risks you have identified (bullet points, diagram, table - wherever your creativity will take you. d) Evaluate the two options and advise Francesca which option to take. Justify your decision with 3- 5 key points (i.e. explain why you reached your conclusion) - prepare 3rd slide with your decision and key arguments. Be ready to present (informally) and discuss your findings if I call on you. Email me your slides (one per group) by 8 pm on Wednesday, October 7, 2020. PS: Slide 2 & 3 can be merged in one. Accueil Insertion Dessin Mise en page » Dites-le-nous >>> Presse-papiers 15 1 Francesca's Case: 2 Group & Names: 3 4 5 6 Sales Revenue 7 Variable Costs 4 x 8 9 A Sales Commission Total Variable Costs 10 Contribution Margin 11 Fixed Salary 12 Other Fixed Costs 13 Total Fixed Costs 14 Net Operating Income A. Police 15 16 Break-even point, units 17 Break-even point, $ 34 35 18 Margin of Safety, units. 19 Margin of Safety, $ 36 37 38 39 40 41 20 Margin of Safety, % 21 22 23 24 25 26 27 28 29 30 31 32 33 Sheet1 fx Alignement Units + B Cost per unit %* Numérique C Option A In Total 200 D 400 Mise en forme conditionnelle Mettre sous forme de tableau Styles de cellule E F Cost per unit G Partager Option B In Total 200 Cellule H 400

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