Question

Pristine Holdings operates two types of retail stores, branded as BlueStores and GreenStores. Selected ratios for these stores are given below:

Ratio	BlueStores	GreenStores
Average settlement period for accounts receivable	59 days	19 days
Average settlement period for accounts payable	45 days	45 days
Gross profit percentage	40%	20%
Profit percentage	8%	8%
Inventory turnover period	60 days	20 days

One brand caters for the upscale market while the other serves the price competitive mass market.

Required:

1. Discuss which of these brands likely caters for the upscale market and which one is price competitive. Justify your views.

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2. A manager in Pristine Holdings mentions that the organisation pays close attention to the inventory levels in its retail chains. Pristine Holdings applies the ‘ABC’ system whereby selective levels of control are applied to different categories of inventory. Discuss these levels of control and indicate which of these categories are likely to be relevant to BlueStores and GreenStores, respectively.

Answer 1

Factors for upscale market and price competetive market

Upscale market :

- in upscale market price is not sensitive as the customers pays attention only for quality with out any price concern

- and there is less gross profit margin when compared to price sensitive market

- and credit period offered to upscale customers is less as customer is ready to pay for good quality

Mass market :

- in Mass market price is sensitive because the customers in these market perfer the quantity and price rather than quality

- gross profit margin is more when compared to upscale market

- the credit period offered to these customers are more as these market is a major target of middle class and lower middle class people, so the customers asks for more credit period.

So in these case by considering the above factors green stores is a upscale market and blue stores is a mass market

(b)

In competetive market ABC method of Valuing inventory is used as its imperative in product profit decision making

In upscale market it is better to value inventory based on LIFO method as its values inventory at market price as product at these market costs are higher.