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Natalie's Knick Knacks is a boutique store that sells seasonal merchandise. For this Christmas season, Natalie paid $50,000 for an order of...
Natalie's Knick Knacks is a boutique store that sells seasonal merchandise. For this Christmas season, Natalie paid $50,000 for an order of figurines, tree ornaments, candles, and wreaths. Natalie marks up each piece of merchandise by 100% to arrive at the selling price. Thus, if Natalie pays $20 for a figurine, she will price it at $40.
Unfortunately, sales were well below expectations, and Natalie's revenues were only $65,000 (far less than the $100,000, or $50,000 × 2, that she had hoped for). This presents a quandary for Natalie, who is contemplating what to do with the unsold merchandise. One option is for Natalie's to store the unsold merchandise for the next 10 months and attempt to sell it the next Christmas season. Natalie estimates that it would cost her $4,000 to properly pack, store, and then unpack all of the unsold merchandise. In addition, because the merchandise would be somewhat dated, Natalie believes that she will only be able to sell 30% of the remaining merchandise the following year (at the current year's retail price). Any unsold items will have negligible resale value, and Natalie plans to donate them to a local charity.
Alternatively, Natalie could hold a January after-Christmas sale. Specifically, Natalie believes that she can sell 100% of the unsold merchandise if she holds an "80% off sale," 80% of the unsold merchandise if she holds a "70% off sale," 55% of the unsold merchandise if she holds a "60% off" sale, and 40% of the unsold merchandise if she holds a "50% off" sale. (The % off is the reduction in the selling price; thus, under a 60% off sale, a figurine priced at $40 would sell for $16, or $40 - [.60 × $40]). Natalie would donate any unsold merchandise to a local charity. (For convenience, restrict attention to these options only).
Required:
a. What options does Natalie face with respect to the unsold merchandise?
b. What is the net cash flow associated with each of Natalie's options?
c. Based on your answer to part (b), what is the opportunity cost associated with each option?
d. What would you recommend to Natalie?
