Question

Show all work and answer parts a to e

Thriftco operates a chain of retail stores. The following data are for the stores of the Plains Division for the most recent year (in thousands of do Fargo Sioux Falls Omaha Sales Cost of Goods Sold Gross Margin 1,200 624 576 1,300 728 572 1,500 750 750 (Depreciation, property tax, insurance, utilities) Expenses: Occupancy Salaries/wages Advertising Miscellaneous Overhead 66 333 56 74 389 82 (50% local, 50% allocated corporate advertising) 62 297 60 5 108 532 (general corporate overhead, allocated at 9% of sales) 117 578 135 687 Segment margin 63 Average operating assets 1,000 950 1,100 Required: a) Recompute segment margin, using concepts learned in class. Use the recomputed numbers to answer the remaining questions. b) Is the Sioux Falls store really losing money? Explain briefly. c) Compute ROI for each store. d) Compute residual income for each store, assuming that Thriftco's target ROI is 15%. e) Which is the top performing store? Identify the main reason for its superior performance.

it is segemented reporting

Answer 1

Answer with working notes and explanation is given below

a) Re-computation of Segment Margin Fargo S ioux Falls $1,200 $1,300 $624 $728 $572 '000 $ Omaha $1,500 $750 $750 A $576 Sales Revenue Less: Variable cost Contribution Less: Fixed Cost Occupancy Salaries/Wages Advertising Miscellaneous Total Fixed Cost Segment Operating Income $62 $297 $74 $389 $41 $30 $5 $66 $333 $28 $6 $433 $139 $7 $394 $511 B $239 A-B $182 Average Operating Assets $1,000 $950 $1,100 Segment Operating Income = Contribution - Controllable Cost Note: Corporate advertising allocated and general corporate overhead is not controllable cost hence not part of Segment Operating Income b) From the above working it is clear there is Positive contribution for Sioux Falls Also the Segment Margin is positive Hence Sioux Falls is not losing money c) Calculation of ROI ROI = Profit Margin X Turnover Profit Margin Segment Operating Income Sales Turnover Sales Operating Assets Segment Margin Turnover Operating Assets Fargo $182 $1,200 $1,000 Sioux Falls $139 $1,300 $950 Omaha $239 A $1,500 B $1,100C Fargo Sioux Falls Omaha 15.17% 10.69% 15.93% A/B Segment Profit margin (Segment Operating Income/Sales) 1.20/ 1.37 1.36 B/C Asset Turnover (Sales/Average operating assets) 18.20% 14.63% 21.73% A/C Return on Investment (ROI) (Operating income/Average assets) d) Calculation of Residual Income Fargo $1,000 Operating Assets Imputed cost at 15% Sioux Falls $950 $143) Omaha $1,100 $165 $150 Fargo $182.00 Sioux Falls $139.00 Omaha $239.00 Segment Operating Income Less: Cost of Capital (Average Operating Asset X 15%) Residual Income $150.00 $32.00 $142.50 - $3.50 $165.00 As calculated above $74.00 e) The Top performing store is Omaha Reason are Better Profit margin Higher turnover of Operating Assets Better Return on Investment (ROI) Residual Income is higher after deducting imputed cost of capital from segment margin When profit margin and turnover is combined it will lead to Return on Investment (ROI) Hence is case of Omaha due to better profit margin and higher turnover of Operating assets it has higher ROI and it is top performing store