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 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 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 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 sec- 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 27,000 4,000 3,000 1,500 3,000 1,500 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. CASE 35: SBS 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 ROI. 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 composit 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 Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $9,450,000 5,670.000 3,780,000 3.240,000 $ 540,000 7 Juvenile Section Revenue Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $1,100,000 605,000 495,000 445.000 $ 50.000 5 Children's Section Sales Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $ 720,000 432.000 288,000 280,000 $ 8.000 4 Children's Activity Centre Revenue Wages, administration, rent, utilities Operational income $ 125,000 240,000 $ (115.000) The average charge is $5 per child. On average the parent(s) 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 centre. The variable costs of these books are 70 percent of the sales value. Restaurant $ 525,000 Sales 210,000 Food, supplies 400.000 Wages, administration, rent, utilities $ (85,000) Operational income The average bill was $9 per customer. On average each of these custom- ers 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. Tango 10 Espresso Bar Sales modsvall $ 300,000 of Food, suppliesim bir 90,000 Wages, administration, rent, utilities to 260,000 Operational income $ (50,000) The average bill was $6 per customer. On average each 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 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 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 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 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 sec- 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 27,000 4,000 3,000 1,500 3,000 1,500 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. CASE 35: SBS 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 ROI. 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 composit 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 Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $9,450,000 5,670.000 3,780,000 3.240,000 $ 540,000 7 Juvenile Section Revenue Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $1,100,000 605,000 495,000 445.000 $ 50.000 5 Children's Section Sales Cost of goods sold Gross margin Wages, administration, rent, utilities Operational income Sales to average book inventory $ 720,000 432.000 288,000 280,000 $ 8.000 4 Children's Activity Centre Revenue Wages, administration, rent, utilities Operational income $ 125,000 240,000 $ (115.000) The average charge is $5 per child. On average the parent(s) 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 centre. The variable costs of these books are 70 percent of the sales value. Restaurant $ 525,000 Sales 210,000 Food, supplies 400.000 Wages, administration, rent, utilities $ (85,000) Operational income The average bill was $9 per customer. On average each of these custom- ers 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. Tango 10 Espresso Bar Sales modsvall $ 300,000 of Food, suppliesim bir 90,000 Wages, administration, rent, utilities to 260,000 Operational income $ (50,000) The average bill was $6 per customer. On average each 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