Analyzing inventory reductions at Supervalue

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. It operates more than 2,400 stores under 14 different brand names, including Albertsons, Farm Fresh, Jewel-Osco, and Save-A-Lot. The company also has a segment that provides third-party supply-chain services. The planned reduction in inventory items was going to be accomplished more by reducing the number of different package sizes than by reducing entire product brands. The new approach was also 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 costs savings Supervalu might realize by reducing the number of items it carries in inventory by 25 percent. 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, Sugar-Bits, for one of its segments that currently produces three products. As a result, the following are expected to occur:

(1)  The number of units sold for the segment is expected to drop by only 40,000 because of the elimination of Sugar-Bits, since most customers are expected to purchase a

Fiber-Treats or Carbo-Crunch product instead. The shift of sales from Sugar-Bits to Fiber-Treats and Carbo-Crunch is expected to be evenly split.

In other words, the sales of Fiber-Treats and Carbo-Crunch will each increase by 100,000 units.

(2)  Rent is paid for the entire production facility, and the space used by Sugar-Bits cannot be sublet.

(3)  Utilities costs are expected to be reduced by $24,000.

(4) T he supervisors for Sugar-Bits were all terminated. No new supervisor will be hired for Fiber-Treats or Carbo-Crunch.

(5)  Half of the equipment being used to produce Sugar-Bits is also used to produce the other two products, and its depreciation must be absorbed by those products.

The company believes that as a result of eliminating Sugar-Bits it can eliminate equipment that has a remaining useful life of five years,

and a projected salvage value of $20,000. Its current market value is $35,000.

(6)  Facility-level costs will continue to be allocated between the product lines based on the number of units produced.

2. How do managers go about making segment or product line elimination decisions?

Product-line Earnings Statements (Dollar amounts are in thousands)

Annual Costs of Operating        Fiber TreatsCarbo treatsSugar BitsTotal

Sales in units480,000480,000240,0001,200,000

Sales in dolllars$480,000$480,000$240,000$1,200,000

Units level costs:

Cost of production48,00048,00026,400122,400

Sales Comissions6,0006,0002,40014,400

Shipping and Handling10,8009,6004,80025,200

Miscellaneous3,6002,4002,4008,400

Total-Unit level costs68,40066,00036,000170,400

Product Level costs:

Supervisors salaries4,8003,6001,2009600

Facility Level costs:

Rent48,00048,00024,000120,000

Utilities60,00060,00030,000150,000

Depreciation on equip.192,000192,00096,000480,000

Allcated Co. wide exp.12,00012,0006,00030,000

Total Facility level costs312,000312,000156,000780,000

Total Production costs385,200381,600193,200$960,000

Profit on products94,80098,40046,800$240,000

Prepare revised product-line earnings statements based on the elimination of Sugar-Bits. It will be necessary to calculate some per-unit data to accomplish this.