Case SBS BOOKS SBS is one of North America's largest book retailers. In the early 1980s, it was formed by the amalgamation of two established booksellers that had 90, stores in regional malls. Subsequently, SBS expanded into a wider variety of retail outlets. There are now 27 superstores, 800 mall stores, and 85 campus bookstores. The mall stores are 4,000 to 5000 square feet each.They are all profitable, but they have little chance of above-average growth. The campus stores are less profitable, but with average profitability, they provide the advertisement for SBS's other stores. It is the superstores that Dino Giovanni, the president and chief executive officer. expects to provide SBS's growth during the next decade. He is so confident that he changed the firm's name to SBS (for Superbook Stores). And in the last two years, he has experimented with a number of concepts to make the superstores exciting places to be and thereby attractive to customers. Dino's superstore idea calls for 40,000 square foot destination bookstores.Books are sold at discounts of 10 to 40 percent, and each store may have a many as 100,000 titles. Variations to the base store that have been tested include a juvenile book section, a children's book section, a children's activity center with supervised babysitting, a restaurant, and an espresso bar. Although stores will vary because of the exact location and premises, the following describes the envisaged superstore: sq. ft. Base Store 27000 Juvenile section increment 4000 Children's section increments 3000 Chilrdren's activity centre 1500 Restaurant 3000 Espressobar 1500 _______ 40,000 Real estate is purchased and/or developed to superstore specifications, and then sold to various pension funds. these properties are, in turn, rented. The belief is that SBS can earn above average return as a book retailer, but property ownership can only yield average returns. Moreover, SBS does not want to tie up its limited financial resources in real estate. This lack of land and buildings means that there are minimal fixed assets on the balance sheet. the only significant item is leasehold improvement, which individual store manager have no control over. Moreover, cash management, regarding cash balances, accounts receivables, accounts payable, and bank loans, is done entirely by the treasurer. As there is a lack of influence over most balance sheet items, the return on investment (ROI) measure for performance at the store level has come to be calculated as operational income (before interest expenses, corporate allocations, and income taxes) divided by average annual book inventory. Currently, Dino is requiring all aspect of the superstores to earn at least a 20 percent ROI. This demanding target necessitates a skillful blend of profit margin on sales and inventory turnover. There is a concern that ROI may not always be appropriate for measuring performance. As a corporate management accountant, you have been assigned to analyze the profitability of the base store and the variations, and make recommendations to Dino on the size and composition of the superstores and the exclusive use of ROI. You have gathered the following information, which is believed to be representative of future potentials. Base Store Sales $ 9,450,000 Cost of goods sold 5,670,000 __________ Gross Margin 3,780,000 Wages,administration, rent, utilities 3,240,000 __________ Operational income $ 540,000 Juvenile Secton Sales $ 1,100,000 Cost of goods sold 605,000 __________ Gross Margin 495,000 Wages,administration, rent, utilities 445,000 __________ Operational income $ 50,000 Children's Section Sales $ 720,000 Cost of goods sold 432,000 __________ Gross Margin 288,000 Wages,administration, rent, utilities 280,000 __________ Operational income $ 8000 Children's Activity Center revenue $125,000 Wages, administration, rent, utilities 240,000 _________ Operational income $(115,000) The average charge is $5 per child. On average, the parents of each child was found by a survey to have bought $10 worth of books strictly because of the babysitting offered by the children's activity center. The variable cots of these books are 70 percent of the sales revenue. Restaurant Sales $525,000 Food, supplies 210,000 Wages,administration, rent ,utilities 400,000 _________ Operational income $(85000) The average bill was $9 per customer. On average each of these customers was found by a survey to have bought $10worth of books strictly because of the restaurant. the variable costs of these books are 70 percent of the sales revenue. Espresso bar Sales $300,000 Food, supplies 90,000 Wages,administration, rent ,utilities 260,000 _________ Operational income $(50,000) The average bill was $6 per customer. On average each of these customers was found by a survey to have bought $15 worth of books strictly because of the espresso bar. The variable costs of these books are 70 percent of the sales revenue. Required : As the corporate management accountant, perform the duties assigned by the president. Use the case approach for this assignment.
SBS is one of North America's largest book retailers. In the early 1980s it was formed by the amalgamation of two established booksellers that had 90 stores in regional malls. Subsequently SBS expanded into a wider variety of retail outlets. There are now 27 superstores, 800 mall stores, and 85 campus bookstores. The mall stores are 4,000 to 5,000 square feet each. They are all profitable, but they have little chance of above-average growth. The campus stores are less profitable, but with average profitability they provide advertisement for SBS's other stores. It is the superstores that Dino Giovanni, the president and chief executive officer, expects to provide SBS's growth during the nos decade. He is so confident that he changed the firm's name to SBS (for Superbook Stores). And in the last two years, he has experimented with a number of concepts to make the superstores exciting places to be and thereby attractive to customers. Dino's superstore idea calls for 40,000 square foot destination book stores. Books are sold at discounts of 10 to 40 percent, and each store may have a many as 100,000 titles. Variations to the base store that have been tested include a juvenile book sce tion, a children's book section, a children's activity centre with supervised baby sitting, a restaurant, and an espresso bar. Although stores will vary because of the exact loca- tion and premises, the following describes the envisaged superstore sq. ft. Base store Juvenile section increment Children's section increment Children's activity centre Restaurant Espresso bar 1 500 Real estate is purchased and/or developed to superstore specifications, and then sold to various pension funds. These properties are, in turn, rented. The belief is that SBS can carn above average return as a book retailer, but property ownership can only yield average returns. Moreover SBS does not want to tie up its limited financial Tesources in real estate. CAME Ses BOOKS/135 This lack of land and buildings means that there are minimal fixed assets on the balance sheet. The only significant item is leasehold improvement, which indi- vidual store managers have no control over. Moreover, cash management, regarding cash balances, accounts receivable, accounts payable, and bank loans, is done entirely by the treasurer. As there is a lack of influence over most balance sheet items, the return on investment (ROI) measure for performance at the store level has come to be calculated as operational income (before interest expenses, corpo rate allocations, and income taxes) divided by average annual book inventory. Cur. rently, Dino is requiring all aspects of the superstores to earn at least a 20 percent ROL. This demanding target necessitates a skilful blend of profit margin on sales and inventory turnover. There is concern that ROI may not always be appropriate for measuring performance. As a corporate management accountant, you have been assigned to analyze the profitability of the base store and the variations, and make recommendations to Dino on the size and composition of the superstores and the exclusive use of ROL You have gathered the following information, which is believed to be representative of future potentials. Base Store Sales 39450.000 Cost of goods sold 56700D 3,750,000 Wages, administrationem, utilities 1240100 Operational income S SLOO Sales to average book inventory Gross margin 51.100.000 Juce Section Revenue Cost of goods sold Gross margin Wagesadministration, rent, utilities Operational income Sales to average book inventory 495.000 445.00 $ Children's Section Sales Cost of goods sold Gross margin Wages, administration test utiles Operational income Silestone book into 3720,000 132.00 IND 2 Cuildren's Activity Centre Berche WA, ministration des Operational income S. The wen charge 55 petose the parents of ads sabo 59th of books strictly 0 Restaurant $ 525,000 Sales 210,000 Food, supplies Wages, administration, rent, utilities S (85.000 Operational income The average bill was 59 per customer. On average each of these custom- ens was found by a survey to have bought $10 worth of books strictly because of the restaurant. The variable costs of these books are 70 per- cent of the sales value. Espresso Bar $ 300,000 Sales 90,000 Food, supplies 260,000 Wages, administration, rent, utilities S (50.000) Operational income The average bill was $6 per customer. On average cach of these custom- ers was found by a survey to have bought $15 worth of books strictly because of the espresso bar. The variable costs of these books are 70 per. cent of the sales value. Required As the corporate management accountant, perform the duties assigned by the president. Use the case approach for this assignment. SBS is one of North America's largest book retailers. In the early 1980s it was formed by the amalgamation of two established booksellers that had 90 stores in regional malls. Subsequently SBS expanded into a wider variety of retail outlets. There are now 27 superstores, 800 mall stores, and 85 campus bookstores. The mall stores are 4,000 to 5,000 square feet each. They are all profitable, but they have little chance of above-average growth. The campus stores are less profitable, but with average profitability they provide advertisement for SBS's other stores. It is the superstores that Dino Giovanni, the president and chief executive officer, expects to provide SBS's growth during the nos decade. He is so confident that he changed the firm's name to SBS (for Superbook Stores). And in the last two years, he has experimented with a number of concepts to make the superstores exciting places to be and thereby attractive to customers. Dino's superstore idea calls for 40,000 square foot destination book stores. Books are sold at discounts of 10 to 40 percent, and each store may have a many as 100,000 titles. Variations to the base store that have been tested include a juvenile book sce tion, a children's book section, a children's activity centre with supervised baby sitting, a restaurant, and an espresso bar. Although stores will vary because of the exact loca- tion and premises, the following describes the envisaged superstore sq. ft. Base store Juvenile section increment Children's section increment Children's activity centre Restaurant Espresso bar 1 500 Real estate is purchased and/or developed to superstore specifications, and then sold to various pension funds. These properties are, in turn, rented. The belief is that SBS can carn above average return as a book retailer, but property ownership can only yield average returns. Moreover SBS does not want to tie up its limited financial Tesources in real estate. CAME Ses BOOKS/135 This lack of land and buildings means that there are minimal fixed assets on the balance sheet. The only significant item is leasehold improvement, which indi- vidual store managers have no control over. Moreover, cash management, regarding cash balances, accounts receivable, accounts payable, and bank loans, is done entirely by the treasurer. As there is a lack of influence over most balance sheet items, the return on investment (ROI) measure for performance at the store level has come to be calculated as operational income (before interest expenses, corpo rate allocations, and income taxes) divided by average annual book inventory. Cur. rently, Dino is requiring all aspects of the superstores to earn at least a 20 percent ROL. This demanding target necessitates a skilful blend of profit margin on sales and inventory turnover. There is concern that ROI may not always be appropriate for measuring performance. As a corporate management accountant, you have been assigned to analyze the profitability of the base store and the variations, and make recommendations to Dino on the size and composition of the superstores and the exclusive use of ROL You have gathered the following information, which is believed to be representative of future potentials. Base Store Sales 39450.000 Cost of goods sold 56700D 3,750,000 Wages, administrationem, utilities 1240100 Operational income S SLOO Sales to average book inventory Gross margin 51.100.000 Juce Section Revenue Cost of goods sold Gross margin Wagesadministration, rent, utilities Operational income Sales to average book inventory 495.000 445.00 $ Children's Section Sales Cost of goods sold Gross margin Wages, administration test utiles Operational income Silestone book into 3720,000 132.00 IND 2 Cuildren's Activity Centre Berche WA, ministration des Operational income S. The wen charge 55 petose the parents of ads sabo 59th of books strictly 0 Restaurant $ 525,000 Sales 210,000 Food, supplies Wages, administration, rent, utilities S (85.000 Operational income The average bill was 59 per customer. On average each of these custom- ens was found by a survey to have bought $10 worth of books strictly because of the restaurant. The variable costs of these books are 70 per- cent of the sales value. Espresso Bar $ 300,000 Sales 90,000 Food, supplies 260,000 Wages, administration, rent, utilities S (50.000) Operational income The average bill was $6 per customer. On average cach of these custom- ers was found by a survey to have bought $15 worth of books strictly because of the espresso bar. The variable costs of these books are 70 per. cent of the sales value. Required As the corporate management accountant, perform the duties assigned by the president. Use the case approach for this assignment
