denoppur supin store dning New York P5-12: Wegmans egmans\' much larger stores s
ID: 2537119 • Letter: D
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denoppur supin store dning New York P5-12: Wegmans egmans' much larger stores stock roughly twice as many items as oto Their most recent ex ys of fresh produce, artisan breads, fresh seafood, and take-emarketnd quality entrees. The company currently operates more than 80e instore in We egmans, a privately owned regional supermarket chain founded in 1916, on the more affluent market by providing a unique shoppinr, Ne ores a more displays of fresh produce, distribution center serving the centers in five states stretching from New York to Virginia. h stores as they are opened. nia with three new stores and a new Wegmans Virginia dist into V new stores, but with al distribution centers that are delivery of the thousande ep ts of its distribution center with capacity to st opet and delivery of the thousands of tesp As Wegmans expands geographi sible for accurate and on-time selection, inventorying, and (fresh produce, meats, seafood, frozen goods, etc.) region. Each store in the region isa total store revenues served by the distribution center n the stores in that distribution store management). All Wegmans stores face the same weighted-average cost of co applied to direct investment in each store (working capital and property, buildine Senior management uses residual income to evaluate the performance of each sto and a The following table summarizes last year's operations of the newesVigina Wegmans flagship store (Rochester I), and the Wegmans store with median entire 80-store chain (Median). Virginia 3's results in the table represent the first operations since opening the store. "Rochester 1" is Wegmans' first megastore, rebuil in 1990, with a very large and loyal customer base. All figures are in thousands of dolla Last Year Virginia 3 $1,100 59,300 58,300 41,510 5,930 5,100 Rochester 1 (000s) Meda $1,500 110,250 28,740 74,970 8,820 4,900 Working capital" 1.30 70,00 4400 Property, building, and fixtures Cost of goods sold Store administration Distribution center charges 630 39 Current assets less current liabilities of the store. Net of accumulated depreciation. Includes all other costs of operating the store, including utilities, occupancy, and store management. Allocation of the fixed and variable costs of the regional distribution center to all the stores served by the distribution certet Allocation based on the store revenues served by the center. Required a. Compute the residual incomes for the Virginia 3, Rochester 1, and the Median stores. b. Write a memo to senior Wegmans managem relative to Rochester 1 and to the Median store. Be sure to provide for all material differences in performance between Virginia 3 and the other tW ent evaluating the performance of stores.Explanation / Answer
Answer a. Amount in '000s Virginia 3 Rochester 1 Median Revenues 59,300.00 110,250.00 70,000.00 Cost of Goods Sold (41,510.00) (74,970.00) (48,300.00) Gross Margin 17,790.00 35,280.00 21,700.00 Store Administration (5,930.00) (8,820.00) (6,300.00) Distribution Center Charges (5,100.00) (4,900.00) (3,900.00) Profits before Capital Charge 6,760.00 21,560.00 11,500.00 Working Capital 1,100.00 1,500.00 1,300.00 Property, building and fixtures 58,300.00 28,740.00 44,000.00 Total Investment 59,400.00 30,240.00 45,300.00 Capital Charge (13%) 7,722.00 3,931.20 5,889.00 Residual Income (962.00) 17,628.80 5,611.00 Answer b. The negative residual Income of the Virginia 3 can be explained by following reasons: 1. Virginia 3 is a newly opened store compared to other Stores. It is likely that Virginia 3 has same volume or loyal customer base as compared to other stores. The Gross Margin of the stores are: Amount in '000s Virginia 3 Rochester 1 Median Revenues 59,300.00 110,250.00 70,000.00 Cost of Goods Sold (41,510.00) (74,970.00) (48,300.00) Gross Margin 17,790.00 35,280.00 21,700.00 Gross Margin Percantage 30.00% 32.00% 31.00% 2. Virginia 3 is a relatively new store and its costruction costs are higher than the other stores due to inflation and higher cost of land. As given in the question, Virginia 3 investment in property, building and fixture is double than in Rochester 1 and over 130% higher than the median store. Without taking into account of inflation, the residual income is always lower for new investments. 3. Expansion into Virginia is in the early stage, with only three stores served by one distribution center. With 80 stores and 10 distribution centers, the average Wegmans store bears roughly 1/8th the cost of the regional distribution center. Virginia 3 must bear roughly 1/3rd the cost of the regional distribution center. Compared to the median store that has more revenue ($70 million vs. $59.3 million), Virginia 3 has 30% more allocated distribution center costs ($5.93 million vs. $3.9 million).
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