Barnes & Noble Case Summary
Barnes & Noble and BN.com
After a careful and thorough analysis of this project, in spite of the fact that it has competitive brand recognition and a new distribution center, we reached the conclusion that this project is not as profitable as it sounds given the negative NPV. In the following paragraphs we describe the decisions made and the reasoning behind them.
In regards to the first decision we made about the use of distribution facility, personnel, and other charges, we went with the head of the production team’s point of view. The reason we chose this point of view is that the distribution facility has already been built, thus we would not be able to lease any of it given the highly specialized nature, so we consider it as a sunk …show more content…
This is to account for the cannibalization that will likely occur as current Barnes & Nobles customers start ordering from bn.com instead of the retail stores. We felt that it was unrealistic to assume that there would not be any cannibalization because bn.com and Barnes & Nobles retail stores will be selling the exact same products. For example, if a loyal customer realized that they could buy the same books online instead of going to the store then their willingness to go to the retail stores will fall. Thus, we decided that the cannibalization must be accounted for in the financial statements. We thought that 5% is a reasonable number given the fact that the online bookstore will generate more customers and offset some erosion. For the allocation of corporate overhead, we agreed with the approach that allocated overhead as a fixed cost. We chose this approach because with the accounting approach, overhead is allocated based on a percentage of sales. Since the sales will grow from $16 million in 1997 to $637.61 million in 2003, allocating based on sales will lead to an over allocation of overhead. With the fixed cost approach overhead will be much more manageable, and it still takes into account the increase in sales by increasing overhead in year
After a careful and thorough analysis of this project, in spite of the fact that it has competitive brand recognition and a new distribution center, we reached the conclusion that this project is not as profitable as it sounds given the negative NPV. In the following paragraphs we describe the decisions made and the reasoning behind them.
In regards to the first decision we made about the use of distribution facility, personnel, and other charges, we went with the head of the production team’s point of view. The reason we chose this point of view is that the distribution facility has already been built, thus we would not be able to lease any of it given the highly specialized nature, so we consider it as a sunk …show more content…
This is to account for the cannibalization that will likely occur as current Barnes & Nobles customers start ordering from bn.com instead of the retail stores. We felt that it was unrealistic to assume that there would not be any cannibalization because bn.com and Barnes & Nobles retail stores will be selling the exact same products. For example, if a loyal customer realized that they could buy the same books online instead of going to the store then their willingness to go to the retail stores will fall. Thus, we decided that the cannibalization must be accounted for in the financial statements. We thought that 5% is a reasonable number given the fact that the online bookstore will generate more customers and offset some erosion. For the allocation of corporate overhead, we agreed with the approach that allocated overhead as a fixed cost. We chose this approach because with the accounting approach, overhead is allocated based on a percentage of sales. Since the sales will grow from $16 million in 1997 to $637.61 million in 2003, allocating based on sales will lead to an over allocation of overhead. With the fixed cost approach overhead will be much more manageable, and it still takes into account the increase in sales by increasing overhead in year