Question

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 dollars).

	Fargo	Sioux Falls	Omaha
Sales	1,200	1,300	1,500
Cost of Goods Sold	624	728	750
Gross Margin	576	572	750
Expenses:
Occupancy	62	66	74		(Depreciation, property tax, insurance, utilities)
Salaries/wages	297	333	389
Advertising	60	56	82		(50% local, 50% allocated corporate advertising)
Miscellaneous	5	6	7
Overhead	108	117	135		(general corporate overhead, allocated at 9% of sales)
	532	578	687
Segment margin	44	-6	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.

Answer 1

Requirement a: Compute segment margin as follows

Particulars	Fargo	Sioux Falls	Omaha
Sales Revenue	$1,200	$1,300	$1,500
Cost of Goods Sold	$624	$728	$750
Gross Margin	$576	$572	$750
Expenses:
Occupancy Costs	$62	66	74
Wages and Salaries	$297	333	389
Local Advertising (60÷2)(56÷2)(82÷2)	$30	$28	$41
Miscellaneous	$5	$6	$7
Total Traceable Expenses	$394	$433	$511
Segment Margin	$182	$139	$239

Requirement b: No, Sioux Falls store is not losing money. Sioux Falls store generated a segment margin of $139 but when the allocated corporate costs of corporate advertising and general corporate overhead were included, the segment showed a net operating loss of -6.  

Requirement c: Compute return on investment as follows

Particulars	Fargo	Sioux Falls	Omaha
Segment Margin	$182	$139	$239
÷ Average Operating Assets	$1,000	$950	$1,100
Return on Investment	18.20%	14.63%	21.73%

Requirement d: Compute residual income as follows

Particulars	Fargo	Sioux Falls	Omaha
Segment Margin (a)	$182	$139	$239
Average Operating Assets	$1,000	$950	$1,100
× Percentage of Target Rate of Return	15%	15%	15%
Target Return on Investment (b)	$150	$143	$165
Residual Income (a) − (b)	$32	($4)	$74

Requirement e: The top performing store is Omaha as the return on investment of this store is 21.73% when compared to 18.20%, 14.63% for Fargo and Sioux Falls respectively. The reasons for this superior performance is that the store generates more revenue relative other stores and its cost of goods sold is lower when compared to other stores.