Question

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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). Sioux Falls Omaha Sales Cost of Goods Sold Gross Margin 1,200 624 576 1,300 728 1,500 750 750 572 62 74 (Depreciation, property tax, insurance, utilities) 66 333 297 389 Expenses Occupancy Salaries/wages Advertising Miscellaneous Overhead 56 (50% local, 50% allocated corporate advertising) (general corporate overhead, allocated at 9% of sales) 108 532 112 578 135 687 Segment margin Average operating assets 1,000 950 1,100 a) Recompute segment margin, 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 :

(a) Re-computation of Segment Margin

	Fargo	Sioux Falls	Omaha '000$
Sales Revenue	$1,200	$1,300	$1,500
Less variable cost	$624	$728	$750
Contribution	$576	$572	$750	A
Less : Fixed cost
Occupancy	$62	$66	$74
Salaries / Wages	$297	$333	$389
Advertising	$30	$28	$41
Miscellaneous	$5	$6	$7
Total Fixed cost	$394	$433	$511	B
Segment operating income	$182	$139	$239	A - B
Average operating assets	$1,000	$950	$1,100

Segment operating income = contribution - controllable cost

Note : Corporate advertising allocation and general corporation overhead is not controllable cost hence not part of segment operating income

(b). Hence Sioux falls is not losing money

From 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	Turnover
Segment operating income	Sales
Sales	Operating Assets

	Fargo	Sioux fall	Omaha
Segment margin	$182	$139	$239	A
Turnover	$1,200	$1,300	$1,500	B
Operating assets	$1,000	$950	$1,100	C

	Fargo	Sioux	Omaha
Segment profit margin (Segment operating income/ sales)	15.17%	10.69%	15.93%	A/B
Asset Turnover (Sales/Average operating assets)	1.20	1.37	1.36	B/C
Return on investment (Operating income / Average assets)	18.20%	14.63%	21.73	A/C

(d). Calculation of Residual income

	Fargo	Sioux falls	Omaha
Average operating assets	$1,000	$950	$1,100
Imputed cost at 15%	$150	$143	$165

	Fargo	Sioux falls	Omaha
Segment operating income	$182.00	$139.00	$239.00
Average operating Asset *15%)	150.00	$142.50	$165.00
Residual income	$32.00	-$3.50	$74.00

(e) The Top performance 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 in case of Omaha due to better profit margin and higher turnover of operating assets it has higher ROI and it is top performing store.