ANALYZE, THINK, COMMUNICATE ATC 13-1 Business Application Case Analyzing inventory reductions at Supervalu ai Real-world companies often reduce the complexity of their operations in an attempt to increase profits. In late 2014 and early 2015 McDonald's Corporation announced a series of restructuring efforts it planned to undertake to improve profitability. One of these was to reduce the number of items offered for sale in its restaurants. In October 2014, General Motors announced plans to reduce the number of vehicle production platforms on which it builds cars from 26 to 4 by 2025. In 2010, Supervalu, Inc., one of the largest grocery store companies in the United States, announced it was planning to reduce the number of different items it carries in its inventory by as much as 25 percent. Most of the planned reduction in inventory items at Supervalu was going to be accomplished by reducing the number of 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 morelemphasis on its own store brands. different Required a. Identify some cost savings these companies might realize by reducing the number of items they sell or use in production. Be as specific as possible, and use your imagination. Consider the additional information presented as follows, 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 Page 502 that currently produces three products. As a result, the following are expected to occur. b. 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. 1. A. 2. Rent is paid for the entire production facility, and the space 3. Utilities costs are expected to be reduced by $24,000. 4. All of the supervisors for Sugar-Bits were terminated. No used by Sugar-Bits cannot be sublet. new supervisors will be hired for Fiber-Treats or Carbo- Crunch. The equipment being used to produce Sugar-Bits is also used to produce the other two products. However, the company believes that as a result of eliminating Sugar-Bits it can dispose of 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 5. 6. Facility-level costs will continue to be allocated between the product lines based on the number of units produced Product-Line Earnings Statements Dollar amounts are in thousands) Annual Costs of Operating Each Product Line Sales in units Sales in dolliars Unit-level costs TreatsCarbo. Total 480.000 400.000 140,00 _1200029 480,000 $480,000 $240,000 $1,200,000 26,400 2.400 Cost of production Sales commissions Shipping and handing 48,000 6,000 10.800 3,600 48,000 6,000 9,600 2.400 14400 2.400 8400 Total unit-ovel costs Product-level costs: 3,600 1,200 9.600 Supervisors' salaries Facility-lovel costs: 192,000 60,0004.000 6.000 48.000 120,000 96000 150.000 312000 312,000 16000780,000 30,000 60,000 48,000 Dwpreciation on soupone1000 194.09 192,000 30,000 Alocated companywide expense Total facility lovel costs 193,200 960,000 381,600 Total product cost Profit on products 94,800 $9840046,800 5 240,000 Prepare revised product-line earnings statements based on the elimination of Sugar-Bits. (Hint: It will be necessary to calculate some per-unit data to accomplish this.)
