Analyzing inventory reductions at Supervalu
On January 12, 2010, Supervalu, Inc., announced it was planning to reduce the
number of different items it carries in its inventory by as much as 25 percent.
Supervalu is one of the largest grocery store companies in the United States.
It operates more than 2,400 stores under 14 different brand names, including
Albertsons, Farm Fresh, Jewel-Osco, and Save-A-Lot. The company also has a
segment that provides third-party supply-chain services. The planned reduction
in inventory items was going to be accomplished more by reducing the number of
different package sizes than by reducing entire product brands. The new
approach was also intended to allow the company to get better prices from its
vendors and to put more emphasis on its own store brands.
Required
a. Identify some costs savings Supervalu
might realize by reducing the number of items it carries in inventory by 25
percent. Be as specific as possible and use your imagination.
b. Consider the additional information
presented below, which is hypothetical. All dollar amounts are in thousands;
unit amounts are not. Assume that Supervalu decides to eliminate one product
line, Sugar-Bits, for one of its segments that currently produces three
products. As a result, the following are expected to occur:
(1) The number of units sold for the segment
is expected to drop by only 40,000 because of the elimination of Sugar-Bits,
since most customers are expected to purchase a Fiber-Treats or Carbo-Crunch
product instead. The shift of sales from Sugar-Bits to Fiber-Treats and
Carbo-Crunch is expected to be evenly split. In other words, the sales of
Fiber-Treats and Carbo-Crunch will each increase by 100,000 units.
(2) Rent is paid for the entire production
facility, and the space used by Sugar-Bits cannot be sublet.
(3) Utilities costs are expected to be
reduced by $24,000.
(4) The supervisors for Sugar-Bits were all
terminated. No new supervisor will be hired for Fiber-Treats or Carbo-Crunch.
(5) The equipment being used to produce
Sugar-Bits is also used to produce the other two products. The company believes
that as a result of eliminating Sugar-Bits it can eliminate equipment that has
a remaining useful life of five years, and a projected salvage value of
$20,000. Its current market value is $35,000.
(6) Facility-level costs will continue to be
allocated between the product lines based on the number of units produced.
.:.
Prepare
revised product-line earnings statements based on the elimination of
Sugar-Bits. It will be necessary to calculate some per-unit data to accomplish
this.
a. By eliminating
25 percent of its inventory items, Supervalu can reduce its costs by:
·
Reducing
the amount of warehouse space it needs to stock its inventory. The fewer items a company has to stock, the
less space it needs, even if its total sales do not change.
·
Reduce
the cost of financing its inventory. The
less inventory it carries, the less money it has tied up in financing
inventory.
·
Reducing
the costs of shipping inventory. It is
easier to ship 1,000 units of one item than it is 500 units of two different
items.
·
Reducing
the record-keeping cost of keeping track of its inventory.
·
Reducing
the number of errors related to pricing its products. Having to price multiple sizes of the same
product can result in errors.
·
Obtaining
lower prices on the inventory it buys.
By purchasing larger quantities of fewer items, it may be able to get
better quantity discounts from its vendors.
b. Per unit data must be calculated for sales
and unit-level costs. These are
(remember, dollar amounts are in thousands):
Fiber-Treats:
Sales $480,000
÷ 480,000 = $1.0000
Cost
of production 48,000 ÷ 480,000 = $ .1000
Sales
commissions 6,000 ÷ 480,000 = $ .0125
Shipping
and handling 10,800 ÷ 480,000 = $ .0225
Miscellaneous 3,600 ÷ 480,000 = $ .0075
Carbo-Crunch:
Sales $400,000
÷ 480,000 = $1.0000
Cost
of production 48,000 ÷
480,000 = $ .1000
Sales
commissions 6,000 ÷
480,000 = $ .0125
Shipping
and handling 9,600 ÷
480,000 = $ .0200
Miscellaneous 2,400 ÷
480,000 = $ .0050
Revised Product-line Earnings
Statements
|
|||
|
Annual Costs of Operating
Each Product Line
|
Fiber-Treats
|
Carbo-Crunch
|
Total
|
Sales in units
|
580,000
|
580,000
|
1,160,000
|
Sales in dollars (1)
|
$580,000
|
$580,000
|
$1,160,000
|
Unit-level costs:
|
|
|
|
|
Cost of production
|
58,000
|
58,000
|
116,000
|
|
Sales commissions
|
7,250
|
7,250
|
14,500
|
|
Shipping and handling
|
13,050
|
11,600
|
24,650
|
|
Miscellaneous
|
4,350
|
2,900
|
7,250
|
|
Total unit-level costs
|
82,650
|
79,750
|
162,400
|
|
|
|
|
|
|
Product-level
costs:
|
|
|
|
|
Supervisors salaries
|
4,800
|
3,600
|
8,400
|
|
|
|
|
|
|
Facility-level
costs:
|
|
|
|
|
Rent (2)
|
60,000
|
60,000
|
120,000
|
|
Utilities (3)
|
63,000
|
63,000
|
126,000
|
|
Depreciation on equipment
|
192,000
|
192,000
|
384,000
|
|
Allocated company-wide expenses (4)
|
15,000
|
15,000
|
30,000
|
|
Total facility-level costs
|
330,000
|
330,000
|
660,000
|
|
Total
product cost
|
417,450
|
413,350
|
830,800
|
|
Profit
on products
|
$162,550
|
$166,650
|
329,200
|
|
Sale
of Sugar-Bits’ equipment
|
|
|
35,000
|
|
Segment
earnings
|
|
|
$364,200
|
(1) $480,000 + 100,000
(2) $120,000 ÷ 2 = $60,000
(3) ($150,000 – 24,000) ÷ 2 = $63,000
(4)
$25,000 ÷ 2 = $12,500
