a retail store sells a popular cosmetic called devine and the store manager was given $130,000 by the…

a retail store sells a popular cosmetic called devine and the store manager was given $130,000 by the corporate office to improve store performance any way she thinks best. the \base case\ information is a price of $26 per bottle, a contribution margin of 0.30, a customer defection rate of 18 percent, and a repurchase frequency of two times a year. if these improvement funds could be used to (a) increase the contribution margin to 0.39 or (b) reduce the customer defection rate to 16 percent or (c) increase the repurchase frequency to five times per year. assume all other variables remain at the base case level for each of the three improvement options.\nuse the excel template vlc to calculate the vlc for each option and summarize your answers using the table below. round your answers to the nearest cent.\n\n| contribution price | repurchase margin | repurchase frequency | defection rate | vlc in $ |\n| ---- | ---- | ---- | ---- | ---- |\n| $26 | 0.30 | 2 | 18% | $ $ |\n| (a) $26 | 0.39 | 2 | 18% | $ $ |\n| (b) $26 | 0.30 | 2 | 16% | $ $ |\n| (c) $26 | 0.30 | 5 | 18% | $ $ |\n\nwhat is the best way to use $130,000 in improvement funds?\nthe best way to use the $130,000 in improvement funds is -select- \n-select-\noption (a)\noption (b)\noption (c)

a retail store sells a popular cosmetic called devine and the store manager was given $130,000 by the corporate office to improve store performance any way she thinks best. the \base case\ information is a price of $26 per bottle, a contribution margin of 0.30, a customer defection rate of 18 percent, and a repurchase frequency of two times a year. if these improvement funds could be used to (a) increase the contribution margin to 0.39 or (b) reduce the customer defection rate to 16 percent or (c) increase the repurchase frequency to five times per year. assume all other variables remain at the base case level for each of the three improvement options.\nuse the excel template vlc to calculate the vlc for each option and summarize your answers using the table below. round your answers to the nearest cent.\n\n| contribution price | repurchase margin | repurchase frequency | defection rate | vlc in $ |\n| ---- | ---- | ---- | ---- | ---- |\n| $26 | 0.30 | 2 | 18% | $ $ |\n| (a) $26 | 0.39 | 2 | 18% | $ $ |\n| (b) $26 | 0.30 | 2 | 16% | $ $ |\n| (c) $26 | 0.30 | 5 | 18% | $ $ |\n\nwhat is the best way to use $130,000 in improvement funds?\nthe best way to use the $130,000 in improvement funds is -select- \n-select-\noption (a)\noption (b)\noption (c)

Answer

Explanation:

Step1: Recall the formula for VLC (Value of a Loyal Customer)

$VLC=\frac{\text{Contribution Margin}\times\text{Price}\times\text{Repurchase Frequency}}{1 + \text{Discount Rate}-\text{Repurchase Frequency}\times(1 - \text{Defection Rate})}$. Assuming a discount rate of 0 (since not given otherwise).

Step2: Calculate VLC for base - case

Contribution margin = 0.30, Price = 26, Repurchase frequency = 2, Defection rate = 0.18 $VLC_{base}=\frac{0.30\times26\times2}{1-(2\times(1 - 0.18))}=\frac{15.6}{1 - 1.64}=\frac{15.6}{- 0.64}$ (This is wrong as we assume discount rate = 0 is not appropriate here. Let's use the simple formula $VLC=\text{Contribution Margin}\times\text{Price}\times\text{Average Lifespan of a customer}\times\text{Repurchase Frequency}$). Average lifespan of a customer = $\frac{1}{\text{Defection Rate}}$. $VLC_{base}=0.30\times26\times\frac{1}{0.18}\times2=\frac{0.30\times26\times2}{0.18}=\frac{15.6}{0.18}\approx86.67$

Step3: Calculate VLC for option (a)

Contribution margin = 0.39, Price = 26, Repurchase frequency = 2, Defection rate = 0.18 $VLC_{a}=0.39\times26\times\frac{1}{0.18}\times2=\frac{0.39\times26\times2}{0.18}=\frac{20.28}{0.18}=112.67$

Step4: Calculate VLC for option (b)

Contribution margin = 0.30, Price = 26, Repurchase frequency = 2, Defection rate = 0.16 $VLC_{b}=0.30\times26\times\frac{1}{0.16}\times2=\frac{0.30\times26\times2}{0.16}=\frac{15.6}{0.16}=97.50$

Step5: Calculate VLC for option (c)

Contribution margin = 0.30, Price = 26, Repurchase frequency = 5, Defection rate = 0.18 $VLC_{c}=0.30\times26\times\frac{1}{0.18}\times5=\frac{0.30\times26\times5}{0.18}=\frac{39}{0.18}\approx216.67$

Answer:

Contribution Price Contribution Margin Repurchase Frequency Defection Rate VLC in $
$26$ $0.30$ $2$ $18%$ $86.67$
$26$ $0.39$ $2$ $18%$ $112.67$
$26$ $0.30$ $2$ $16%$ $97.50$
$26$ $0.30$ $5$ $18%$ $216.67$

The best way to use the $130,000 in improvement funds is option (c)