ATC 13-1 Business Application Case Analyzing inventory reductions at Supervalu

Real-world companies often reduce the complexity of their operations in an attempt to increase profits. In late 2014 and early 2015 McDonalds 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 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

1. 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.
2. 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.) 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 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) All of the supervisors for Sugar-Bits were terminated. No new supervisors will be hired for Fiber-Treats or Carbo-Crunch.

(5) The equipment being used to produce Sugar-Bits will be sold. The company believes that it can dispose of equipment for a gain of $35,000. No changes will be made in the equipment used to produce Fiber-Treats and Carbo-Crunch.

(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	Fiber-Treats	Carbo-Crunch	Sugar-Bits	Total
Sales in units	480,000	480,000	240,000	1,200,000
Sales in dollars	$480,000	$480,000	$240,000	$1,200,000
Unit-level costs:
Cost of production	48,000	48,000	26,400	122,400
Sales commissions	6,000	6,000	2,400	14,400
Shipping and handling	10,800	9,600	4,800	25,200
Miscellaneous	3,600	2,400	2,400	8,400
Total unit-level costs	68,400	66,000	36,000	170,400
Product-level costs:
Supervisors salaries	4,800	3,600	1,200	9,600
Facility-level costs:
Rent	48,000	48,000	24,000	120,000
Utilities	60,000	60,000	30,000	150,000
Depreciation on equipment	192,000	192,000	96,000	480,000
Allocated companywide expenses	12,000	12,000	6,000	30,000
Total facility-level costs	312,000	312,000	156,000	780,000
Total product cost	385,200	381,600	193,200	960,000
Profit on products	$ 94,800	$ 98,400	$ 46,800	$ 240,000