Retailing 8th Edition by Patrick Dunne,Robert Lusch, James Carver

Exercise 15

If you think you might want to be a retail entrepreneur, you can use the "Planning Your Own Entrepreneurial Retail Business" computer exercises at the end of each chapter to assist you in this process. In addition, this text's website (www.cengage.com/marketing/dunne) has an exercise called "The House: Understanding A Retail Enterprise Using Spreadsheet Analysis" that can be used to help you understand the dollars and cents of retailing.
This first exercise is intended to acquaint you with how sensitive your retail business will be to changes in sales volume. Let's assume that you plan that your retail business will generate $650,000 per year in annual sales and that it will operate at a gross-margin percentage of 40 percent. If your fixed operating expenses are $180,000 annually and variable operating costs are 12 percent of sales, then how much profit will you make
(Hint: sales × gross-margin percentage = gross margin; gross margin fixed operating expenses sales × variable operating expenses as % of sales = net profit.) Use a spreadsheet program on your computer to compute your firm's net profits; next, analyze what happens (1) if sales drop 10 percent and (2) if sales rise 10 percent. Why are bottom line results (net profits) so sensitive to changes in sales volume