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:

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.

Rent is paid for the entire production facility, and the space used by Corn Clusters cannot be sublet.

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

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

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.

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
Annual 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 (1)	$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 (2)	100,000	100,000	50,000	250,000
Utilities (3)	112,500	112,500	56,250	281,250
Depreciation on equipment (4)	400,000	400,000	200,000	1,000,000
Allocated company-wide expenses (5)	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