1.4 B&P Homework Question

Bits and Pieces (B&P) operates a retail store selling spares and accessories for the car market. The store has previously only opened for six days per week for the 50 working weeks in the year, but B&P is now considering also opening on Sundays.

The sales of the business on Monday through to Saturday averages at $10,000 per day with average gross profit of 70% earned.

B&P expects that the gross profit % earned on a Sunday will be 20 percentage points lower than the average earned on the other days in the week. This is because they plan to offer substantial discounts and promotions on a Sunday to attract customers. Given the price reduction, Sunday sales revenues are expected to be 60% more than the average daily sales revenues for the other days. These Sunday sales estimates are for new customers only, with no allowance being made for those customers that may transfer from other days.

B&P buys all its goods from one supplier. This supplier gives a 5% discount on all purchases if annual spend exceeds $1,000,000.

It has been agreed to pay time and a half to sales assistants that work on Sundays. The normal hourly rate is $20 per hour. In total five sales assistants will be needed for the six hours that the store will be open on a Sunday. They will also be able to take a half-day off (four hours) during the week. Staffing levels will be allowed to reduce slightly during the week to avoid extra costs being incurred.

The staff will have to be supervised by a manager, currently employed by the company and paid an annual salary of $80,000. If he works on a Sunday he will take the equivalent time off during the week when the assistant manager is available to cover for him at no extra cost to B&P. He will also be paid a bonus of 1% of the extra sales generated on the Sunday project.

The store will have to be lit at a cost of $30 per hour and heated at a cost of $45 per hour. The heating will come on two hours before the store opens in the 25 winter weeks to make sure it is warm enough for customers to come in at opening time. The store is not heated in the other weeks.

The rent of the store amounts to $420,000 per annum.

Required:

(a) Calculate whether the Sunday opening incremental revenue exceeds the incremental costs over a year (ignore inventory movements) and on this basis reach a conclusion as to whether Sunday opening is financially justifiable. (12 marks)

(b) Discuss whether the managers pay deal (time off and bonus) is likely to motivate him. (4 marks)

(c) Briefly discuss whether offering substantial price discounts and promotions on Sunday is a good suggestion. (4 marks)

(20 marks)