MGMT 502: Managerial Accounting
Homework set #1
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
What options does Natalie face with respect to the unsold merchandise?
Natalie has two real options in front of her in regards to the unsold merchandise. She can store
the remaining items, pay an additional fee for storage and try to sell the unsold merchandise the
following Christmas season, recouping only a percentage of her initial costs and creating a sunk
cost for the then remaining inventory by donating it to the local charity.
Natalie’s second option
is to have an after Christmas sale in hopes of recouping a percentage of costs of the remaining
inventory, also creating a sunk cost from the then remaining inventory by donating it to local