Centralisation and decentralisation — practice questions

Central case: Brand consistency — customers expect same core menu; central purchasing lowers food cost.

Decentral case: Local tastes (spicy options, religious dietary needs) boost local sales (3.1.5 segmentation).

Hybrid (typical): Core menu central; 10% local items approved by regional manager — controlled decentralisation.

Controls: Central food safety standards; franchisees cannot change recipes without approval.

Step 1: Analyse the Centralised Option

• Calculate Total Procurement Cost: This is the cost of buying all 20,000 units at the discounted price. $\text{Cost} = \text{Total Units} \times \text{Unit Cost}$ $\text{Cost} = 20,000 \times \text{\textdollar}60 = \text{\textdollar}1,200,000$

• Calculate Expected Sales Revenue: Sales are expected to be 85% of the total stock. $\text{Units Sold} = \text{Total Units} \times \text{Sales Rate}$ $\text{Units Sold} = 20,000 \times 85\% = 17,000 \text{ units}$ $\text{Revenue} = \text{Units Sold} \times \text{Selling Price}$ $\text{Revenue} = 17,000 \times \text{\textdollar}120 = \text{\textdollar}2,040,000$

• Calculate Gross Profit (Centralised): $\text{Gross Profit} = \text{Revenue} - \text{Total Procurement Cost}$ $\text{Gross Profit} = \text{\textdollar}2,040,000 - \text{\textdollar}1,200,000 = \text{\textdollar}840,000$

Step 2: Analyse the Decentralised Option

• Calculate Total Procurement Cost: This is the cost of buying all 20,000 units at the standard price. $\text{Cost} = 20,000 \times \text{\textdollar}70 = \text{\textdollar}1,400,000$

• Calculate Expected Sales Revenue: Sales are expected to be 95% of the total stock due to better local matching. $\text{Units Sold} = 20,000 \times 95\% = 19,000 \text{ units}$ $\text{Revenue} = 19,000 \times \text{\textdollar}120 = \text{\textdollar}2,280,000$

• Calculate Gross Profit (Decentralised): $\text{Gross Profit} = \text{\textdollar}2,280,000 - \text{\textdollar}1,400,000 = \text{\textdollar}880,000$

Step 3: Compare and Recommend

• Profit Comparison:

  • Centralised Gross Profit: $840,000$
  • Decentralised Gross Profit: $880,000$

• Difference: $\text{\textdollar}880,000 - \text{\textdollar}840,000 = \text{\textdollar}40,000$

Conclusion & Recommendation:

The financial analysis shows that the decentralised purchasing strategy is expected to generate $40,000 more in gross profit than the centralised strategy. The higher revenue from better sales forecasting outweighs the higher unit cost.

Recommendation: RetailCo should adopt a decentralised purchasing strategy for this product line. This not only offers a financial advantage but will also empower local managers, potentially increasing their motivation and responsiveness to local market trends. However, the company should ensure strong communication channels are in place to share best practices between stores.