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 :

Contribution margin, Performance measurement, Relevant cost and revenue, and ROI for the case presentation work.

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