Assignment

Printers Plus is a retailer of printers and ink cartridges. The printers carry a low profit margin and the ink cartridges a very high margin. Following is an aggregated budgeted performance plan for 20X5.

Spreadsheet f x

A B C D E F

1 Budgeted Performance Report

All Stores For The Year Ending December 31, 20X5

2

3 Sales:

4 Printers $4,500,000

5 Cartridges 4,500,000

6 Total sales $9,000,000

7

8 Less variable expenses:

9 Printers $4,000,000

1 0 Cartridges 1,500,000

1 1 Total variable expenses $5,500,000

1 2

1 3 Contribution margin $3,500,000

1 4 Traceable fixed costs 1,550,000

1 5 Location margin $1,950,000

1 6 Common fixed costs 1,400,000

1 7 Stores margin $ 550,000

1 8

Although total sales met expectations for the year, management is upset that the targeted margins were not achieved. Following is the "store by store" actual performance report. Evaluate the detailed data and write a paragraph explaining the loss. If each store has a positive margin, as shown in the report on the fol- lowing page, why is management upset?

Evaluating performance reports B-22.03

Spreadsheet f x

A B C D E

1 Actual Performance Report

All Stores For The Year Ending December 31, 20X5

2 Store A Store B Store C

3 Sales:

4 Printers $2,000,000 $2,500,000 $1,000,000

5 Cartridges 500,000 2,000,000 1,000,000

6 Total sales $2,500,000 $4,500,000 $2,000,000

7

8 Less variable expenses:

9 Printers $1,777,778 $2,222,222 $ 888,889

1 0 Cartridges 166,667 666,667 333,333

1 1 Total variable expenses $1,944,444 $2,888,889 $1,222,222

1 2

1 3 Contribution margin $ 555,556 $1,611,111 $ 777,778

1 4 Traceable fixed costs 450,000 600,000 500,000

1 5 Location margin $ 105,556 $1,011,111 $ 277,778

1 6

Sherwin Corporation has three business segments: paint, wallpapers, and tools. The company's assumed cost of capital is 10%. Financial information about each segment follows:

Paint segment Wallpaper segment Tools segment

Segment operating income $ 650,000 $ 475,000 $ 900,000

Invested capital 6,500,000 3,500,000 7,500,000

(a) Prepare an analysis of residual income for each segment, and note which segment has the highest residual income.

Residual income B-23.07

Samstrun Electronics Store has three major departments: computers, televisions, and appliances. The appliance department has been a consistent money loser, as typified by the following recent monthly operating report:

Total Computers TVs Appliances

Sales $2,550,000 $750,000 $1,200,000 $600,000

Variable expenses 2,100,000 600,000 1,000,000 500,000

Contribution margin $ 450,000 $150,000 $ 200,000 $100,000

Fixed expenses 305,000 100,000 80,000 125,000

Income (loss) $ 145,000 $ 50,000 $ 120,000 $( 25,000)

Management is considering a strategy to exit the appliance business. If this strategy is followed, the floor space currently dedicated to appliances will be used to expand the television showroom space. It is believed that television sales will increase by 40%.

Fixed expenses that can be eliminated by abandoning appliance sales include the salary of a service tech and the lease of a delivery van. The two components total $10,000 per month. The remaining fixed costs relate to facilities expenses and employees that will be diverted to television sales activities.

Evaluate the impact on total profitability of exiting the appliance sales market. How can overall profits be negatively impacted by abandoning an "unprofitable" product line?

Evaluating the elimination of a segment I-23.03