Policy on Refunds - Research Paper Example

? A. If the business is in the retail, wholesale or manufacturing sector, prepare a policy on refunds and returns. Ensure that the policy complies with all relevant legislation. Include an estimation of what the cost (percentage of sales) of this policy will be to the business and explain the reasoning behind this estimate. Policy on Refunds While there is no law that requires a business to refund customers when they change their mind about a purchase, it is still a good business practice to enforce a Policy on Refunds as a last ditch effort to retain customers’ goodwill in situations where they are unhappy with our product especially when the products purchased are defective and within manufacturer’s warranty. This should be balanced however with business pragmatism so that the number of refunds will not take its toll on the business bottom line. Before refunding the customer, the business should attempt to replace or repair the unit to keep the sale. If this is unavoidable, the following criteria should be met as a policy; 1. The unit broke down within the manufacturer’s warranty period. It should be established that the malfunction was due to normal use. A brief inquiry as to the circumstance why the unit broke down should be conducted by the frontliners. 2. In cases where customers’ merely had a change of heart with regard to the purchase, there will no refund. If the products are faulty, we will meet our obligations under the Consumer Guarantees Act to provide a remedy. To save the sale, a replacement with an extended warranty can be offered to the customer. 3. The business should not bear the cost for the faulty unit as we are mere dealers. All cost with units that has been refunded due to manufacturer’s defect and within warranty should be passed on to the supplier for refund. B. If the business is in the service sector, prepare a policy on how you will charge your clients. Ensure that the policy complies with all relevant legislation and provides for a clear explanation of the service being offered. Include the terms and conditions that will apply to estimates and quotes and make provision for some system of arbitration in case of a dispute. To keep customer’s goodwill and establish a “service leader” image among our customers, units which are faulty that are within the manufacturer’s warranty should be replaced without cost and inconvenience to the customers. The business however should be careful that the manufacturer’s criteria for replacement are strictly met so that we can pass the cost to them. For units that malfunctioned beyond the manufacturer’s warranty period, could be repaired by our service business unit at a discount to encourage customer retention and cultivate customer goodwill. This will also increase our bottom line as the company can still make business for an after sales support that is not covered by the manufacturer. As much as possible, we will avoid absorbing the costs due to refunds as this will burden our expenditures and undermine our competitiveness. It has to be understood that at this point in time, the business is still in its introductory phase and it will be unwise to jack up prices to factor in costs associated with refunds. The business is still in the process of penetrating the market and it has direct competitors with the same product and as such, pricing should be kept to be competitive to remain viable in the industry. C. A breakdown of all the costs that you will incur in acquiring or manufacturing your products or developing your services up to the point of sale (you may, if you wish, focus on one product or service). The costs should be inclusive, including all materials, labour, administration, insurances, rental, electricity, promotion and other expenses. The nature of the business is retail so the manufacturing overheads will not reflect in our financial statements. Freight and delivery should be shouldered by the supplier also. Our overhead will mainly focus on the operation of the product distribution and upkeep of the outlet which can be enumerated in the following; 1. Rent $ 2,000 2. Salaries (20 people) 65,000 3. Utility 10,000 4. Insurance 1,500 5. Maintenance 1,500 6. Advertising 3,000 7. Depreciation 300 8. Working Inventories 68,000 9. Supplies for repair 2,000 10. Office Supplies 500 11. Others 2,000 Total Cost $155,800 D. Identify which costs will be direct and which will be indirect (maintain consistency and show how you have apportioned overheads if you have chosen to focus on one product or service). The nature of the business is the retail of dual SIM celphone. Costs that are directly associated with the operation of the distribution are as follows (direct cost); Direct Costs Working Inventory $68,000 Salaries 65,000 Supplies for repair service 2,000 Total Direct Cost $135,000 Indirect costs are overheads or costs that are not directly associated in the distribution of the product. They are the costs associated with the upkeep of the outlet to facilitate the retail of the products. Indirect Costs Rent $ 2,000 Utility 10,000 Maintenance 1,500 Insurance 1,500 Advertising 3,000 Office supplies 500 Depreciation 300 Others 2,000 Total Indirect Cost $ 20,800 E. Provide an explanation (maximum 150 words) of how overheads would appear on a balance sheet and how overheads would appear on a profit and loss statement (also known as an income statement): A. Under variable costing Under variable costing, the variable costs will be first deducted from the sales in the profit and loss statement with the fixed costs treated differently or deducted later. The Cost of Goods Sold or in the case of our business, the inventories are only deducted after the variable cost. These could result to a higher net profit when reflected in the balance sheet as the fixed cost is not yet reflected. This is typically done to guide the management in figuring out how the volume of output will have an effect on profit. B. Absorption Costing Absorption costing is the typical costing where Cost of Goods Sold or the inventories in the case of our business is directly deducted from the sales in the Profit and Loss Statement. All other costs, including the fixed costs are also deducted. In reflecting the net income in the balance sheet, it may appear lower compared to the marginal costing method but all costs are already factored in. Read More