Retail Op

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OPIM340 Retail Operations
Assignment 1: Retail Valuation (45 points)
Due: start of class Lecture 2

1. How does the strategic profit model assist retailers in planning and evaluating their marketing and financial strategies? (Limit your answer to 3-4 sentences max) (3 points)

2. Explain inventory turnover? Why does a low inventory turnover indicate more risk than a high turnover? Why do different products have different benchmarks for inventory turnover? (3 points) Average Inventory at Cost is $1,000. Say you have gross profit margins of 20%. If you sell $5,000 per year of this product, you make 20% of that or $1,000 in gross profit. What is your GMROI? (1 point)

What is your Inventory Turnover? (1 point)
What are your Days Sales of Inventory (given your turnover, how many days of inventory do you hold on average) (1 point)

3. A retailer has yearly sales of $800,000. Inventory on January 1 is $300,000 (at cost). During the year, $600,000 of merchandise (at cost) is purchased. The ending inventory is $305,000 (at cost). Operating costs are $90,000. Calculate the cost of goods sold and net profit and set up a P&L statement. (3 points) 4. A computer retailer has net annual sales of $150,000 and average inventory at cost is $20,000. What is the annual sales-to-stock measure? (1 point) If the computer retailer has a gross margin percentage of 15, what is the gross margin return on investment (GMROI)? (1 point)

5. A large catalog retailer of fashion apparel reported $100,000,000 in revenues over the last year. On average, over the same year, the company had $5,000,000 worth of inventory in their warehouses. Assume that units in inventory are valued based on cost of goods sold (COGS) and that the retailer has a 100 percent markup on all products. The company uses a 40 percent per year cost of inventory. That is, for the hypothetical case that one item of $100 COGS would sit exactly one year in inventory, the company charges itself a $40 inventory cost. a) How many times each year does the retailer turn its inventory? (2 points) b) What is the inventory cost for a $30 COGS item? You may assume that inventory turns are independent of the price. (2 points)

6. Tiffany’s and Blue Nile: Comparing Financial Performance Charles Lewis Tiffany and John Young founded Tiffany & Young in New York City in 1837. The store sold stationary and costume jewelry and offered a unique, fixed price, no-haggling approach. In 1845, the company began selling fine jewelry, primarily to the growing number of wealthy Americans. The company moved in 1940 to its landmark Fifth Avenue location, showcased in Truman Capote’s 1958 novella Breakfast at Tiffany’s and the 1961 movie of the same name, starring Audrey Hepburn. Tiffany’s offers fine jewelry and watches, silverware, china, stationary, and other luxury items with outstanding customer service. Almost 85 percent of its sales are from jewelry, including exclusive designs by Frank Ghery, Elsa, Peretti, and Paloma Picasso. When sold, its merchandise is packaged in the company’s trademarked Tiffany Blue Box. Sixty-five percent of the merchandise sold is manufactured by Tiffany’s in two plants located in the United States. Tiffany’s operates over 65 stores in the United States and more than 100 stores in international markets. About 50 percent of the sales come from the domestic stores, with the flagship store in Manhattan accounting fro 20 percent of U.S. sales. Tiffany’s retail stores range from approximately 1,300 to 18,000 square feet, with an average size of approximately 7,100 square feet. New stores are typically 5,000 square feet. To entice budget-minded, younger customers, Tiffany has broadened its merchandise mix to include key chains and other items that sell for much less than the typical Tiffany’s price tag. However, expanding its product line and broadening its market has had mixed results. The company’s more...
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