Case Study: Store Pre-opening Costs

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Here is a simple example of how this technique leads to better analysis, forecasting, and evaluation of performance.

 

 

Cost Plus has been opening an increasing number of stores each year. Its pre-opening costs have been increasing correspondingly. Have they been doing a good job of managing opening costs?

 

 

If you look at the traditional measure of average cost per new store, it appears Cost Plus did a good job of managing opening costs through 1998, then did so-so until 2003.

 

 

If we look at the relationship between number of stores opened and pre-opening cost, however, we can see that the good performance indicated by the average cost per store opened was really due to the increasing number of stores opened. 1995-1997 were about average, and 1998 was actually below average. 2000 and 2002 were both higher than expected, but 2003 was again below average. Overall, there is a strong, consistent relationship between the number of stores opened and pre-opening costs.

 

This linear relationship gives a better indication of performance, although as the number of stores opened each year grows, the average cost per store will continue to approach the marginal rate.

 

Identification of this relationship also makes forecasting easier. The forecast of pre-opening expense for a year can be obtained by applying this formula to the expected number of stores to be opened. Also, should there be a variance in the number of stores opened, the forecast can be easily adjusted to account for the error in store count. This isolated the impact of cost per store performance from the number of stores actually opened.

 

 

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