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  1. Case Summary

    Business Applications Case part a (see below)

    Case Analysis

    Business Applications Case part b (see below)

    Executive Decisions

    Discuss the qualitative factors that should be considered before making a decision to eliminate a product line or business segment.

please include 2 scholorly citations (no websites)

  1. Business Application Case

    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.  As of February 25, 2012, it operated more than 2,400 stores under 12 different brand names, including Albertsons, Farm Fresh, Jewel-Osco, and Save-A-Lot.  The company also has a wholesale segment that distributes goods to other retailers.

    Most of the planned reduction in inventory items was going to be accomplished by reducing the number of different package sizes rather than by reducing entire product brands. The new approach was 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 cost savings Supervalu might realize by reducing the number of items it carries in inventory. 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, Corn Clusters, 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 125,000 because of the elimination of Corn Clusters, since many customers are expected to purchase an Oat Flakes or Fiber Squares product instead. The shift of sales from Corn Clusters to Oat Flakes and Fiber Squares is expected to be evenly split. In other words, the sales of Oat Flakes and Fiber Squares will each increase by 50,000 units.

    (2) Rent is paid for the entire production facility, and the space used by Corn Clusters can- not be sublet.

    (3) Utilities costs are expected to be reduced by $40,000.

    (4) All of the supervisors for Corn Clusters will be terminated. No new supervisors will be hired for Oat Flakes or Fiber Squares.

    (5) Half of the equipment being used to produce Corn Clusters is also used to produce the other two products, and its depreciation cost must be absorbed by them. The remaining equipment has a book value of $340,000 but can be sold for only $60,000.

    (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 Corn Clusters. (Hint: It will be necessary to calculate some per-unit data to accomplish this).

    Product-Line Earnings Statements

    (Dollar amounts are in thousands)

    Annual Revenue and Costs of Operating Each Product Line

    Oat Flakes

    Fiber Squares

    Corn Clusters

    Total

    Sales in units

    450,000

    450,000

    225,000

    1,125,000

    Sales in dollars

    $900,000

    $900,000

    $450,000

    $2,250,000

    Unit-level costs:

      Cost of production

    85,500

    85,500

    46,200

    217,200

      Sales commissions

    11,700

    11,700

    6,000

    29,400

      Shipping and handling

    20,250

    18,000

    9,000

    47,250

      Miscellaneous

    6,750

    4,500

    2,250

    13,500

      Total unit-level costs

    124,200

    119,700

    63,450

    307,350

    Product-level costs:

      Supervisors’ salaries

    9,600

    7,200

    2,400

    19,200

    Facility-level costs:

      Rent

    100,000

    100,000

    50,000

    250,000

      Utilities

    112,500

    112,500

    56,250

    281,250

      Depreciation on equipment

    400,000

    400,000

    200,000

    1,000,000

      Allocated companywide expenses

    22,500

    22,500

    11,250

    56,250

      Total facility-level costs

    635,000

    635,000

    317,500

    1,587,500

    Total product cost

    768,800

    761,900

    383,350

    1,914,050

    Profit on products

    $131,200

    $138,100

    $66,650

    $335,950