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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). Farge Sioux Falls Omaha 1,200 1,500 Sales Cost of Goods Sold Gross Margin 1,300 228 572|| 576 297 Eupenses Occupancy Salaries/wages Advertising Miscellaneous Overhead 108 532 1 121 135 578 687 Segment margin _ 44 Average operating assets 1,000 950 1,100 (Depreciation, property tax, insurance, utilities) (50% local, 50% allocated corporate advertising) (general corporate overhead, allocated at 9% of sales) 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

Answer with working notes is given below

a) Re-computation of Segment Margin '000 $ Fargo $1,200 $624 Sioux Falls $1,300 $728 $572 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 $30 $5 $394 $182 $66 $333 $28 $6 $433 $139 $74 $389 $41 $7 $511 B $239 A-B 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) Hence Sioux Falls is not losing money From the above working it is clear there is Positive contribution for Sioux Falls Also the Segment Margin is positive c) Calculation of ROI ROI = Profit Margin X Turnover Profit Margin Segment Operating Income Sales Turnover Sales Operating Assets Fargo $182 Segment Margin Turnover Operating Assets $1,200 $1,000 Sioux Falls $139 $1,300 $950 Omaha $239 A $1,500 B $1,100 C Sioux Falls Omaha 15.17% 10.69% Segment Profit margin (Segment Operating Income/Sales) 15.93% A/B 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 | Average Operating Assets Imputed cost at 15% Fargo $1,000 $150 Sioux Falls $950 $143 Omaha $1,100 $165 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 The following are the reasons: Better Return on Investment (ROI) Residual Income is higher after deducting imputed cost of capital from segment margin When profit margin and turnover ratio is multiplied 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