Analysing Statement Question's Essay

1072 Words Aug 26th, 2011 5 Pages
Q1. Which of the following types of firms do you expect to have particularly high or low asset turnover?

Supermarket – High asset turnover. Supermarkets tend to be high volume businesses. Many of the food products in supermarkets are perishable, and freshness is often used to differentiate products, forcing a certain amount of inventory turnover. The typical consumer buys groceries on a regular basis, guaranteeing grocery stores a certain level of overall business. Apart from inventories, supermarkets largest assets are its warehouses and stores, all constructed to be relatively inexpensive. Thus, high sales volumes generate a high measured level of asset turnover.

Pharmaceutical Company – High asset turnover. Drugs typically have a
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Moreover, steel-making equipment has a useful lifetime measured in decades. Relative to this enormous investment, a steel company’s sales will be low. Consequently, a steel company will typically have low asset turnover.

Q2. Which of the following types of firms do you expect to have high or low sales margins?

Supermarket – low margins. Competition in the supermarket industry is very intense. Different supermarkets carry most of the same brands of food so there is little differentiation of products. Consumers are sensitive to changes in the prices, and switching costs are very low, usually no more than the opportunity cost o going to another supermarket. Consequently, pricing is the major area of competition among supermarkets leading to extremely low margins.

Pharmaceutical company – high sales margins. Drugs manufactured by pharmaceutical companies are often protected from competition by patents, allowing them to charge monopoly prices. Even where drugs are not protected by patents, pharmaceutical companies invest considerable resources in differentiating their products along non-price dimensions such as efficacy and ease of use. Consequently, pharmaceutical companies typically boast very high sales margins. As an aside, drug companies argue that these high margins are necessary to support their ongoing and expensive research for new drugs, much of which never makes it to the market.

Jewellery retailer – high sales
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