Segment Profitability Report

Fill in the boxes with ______ blanks for this BCPI Segment Profitability Report

Retail Accounts:	Grocery	Drug	Mass Merchandise (trade price reflects proposed 5% decrease)
Unit Sales	6,100,000	1,200,000	2,400,000
Trade Price	$1.90	$1.90	$1.52
Revenue	$11,590,000	______	______
COGS/unit	$1.17	$1.17	$1.17
Unit Sales/segment	6,100,000	1,200,000	2,400,000
Subtotal COGS	$7,137,000	$1,404,000	________
Labeling Cost	n/a	n/a	_______
COGS/segment	$7,137,000	________	_______
Net Margin	$4,453,000	______	______
Controllable Fixed Costs
Stocking Cost	$1,170,000	______	______
Delivery Cost	$1,404,000	______	______
Total Controllable Fixed Costs:	$2,574,000	______	______
Profit/segment	$1,879,000	______	______

Trade prices for grocery and drug stores were $1.90/unit and $1.60/unit for value savings. The machinery required to apply new labels had an annual lease of $60k/year and labels cost an additional .06 unit

Cost Category/Segment	Grocery 450 loc, 2 del/wk	Drug 240 loc, 1 del/wk	Mass Merch loc, del/wk
Stocking Cost ($/Delivery)	$25	$20	______
Delivery Cost ($/Delivery)	$30	$30	_____

**Stocking Cost and Delivery Cost for each segment is the product of:

Cost/delivery x deliveries/week x 52 weeks x number of retail locations served

Grocery’s Stocking Cost example: $25 x 2 dels/wk x 52 wks x 450 locations = $1,170,000

Grocery’s Delivery Cost example: $30 x 2 dels/wk x 52 wks x 450 locations = $1,404,000

All deliveries were store direct with 2 deliveries to grocery stores-1 delivery per week to drug stores- 3 deliveries per week to mass merch stores. Standard route trucks were used for drug and grocery store & extended vehicles were used to help accommodate higher volume.

Background:

AD logistics manager at BPCI., was faced with a difficult task. JK, the new vice president, had circulated a letter from BPCI’ only mass merchandise customer, Vast Savings Stores, complaining of poor operating performance. Among the problems cited by Vast Savings Stores were: (1) frequent stockouts on store shelves (2) poor customer service responsiveness and (3) high prices for BPC products. The letter suggested that if BPC were to remain a supplier to Vast Savings Stores, it would need to eliminate stockouts by: (1) providing direct store delivery four times per week (instead of three) (2) installing an automated order inquiry system to increase customer service responsiveness ($600,000 investment) and (3) decreasing product prices paid by Value by 5 percent. While the previous vice president would most certainly have begun implementing the suggested changes, JK was different. She requested that AD prepare a detailed analysis of BPCs’ profitability by segment. She also asked that it be prepared on a spreadsheet to permit some basic analysis.

BPC is the second-largest potato chip producer in the mid-Indiana market. The company was founded in 1962 and following an unsuccessful attempt at national expansion has remained primarily a regional operation. The company currently manufactures and distributes several varieties of potato chips to three different types of retail accounts: grocery, drug, and mass merchandise. The largest percentage of business is concentrated in the grocery segment, with 450 retail customer locations accounting for 6,100,000 annual unit sales and more than 65 percent of annual revenue. The drug segment comprises 240 customer locations which account for 1,200,000 annual unit sales and about 13 percent of annual revenue. In the mass merchandise segment, BPC has one customer (Vast Savings) with 36 locations that account for 2,400,000 annual unit sales and almost 22 percent of annual revenue. All distribution is store-direct, with delivery drivers handling returns of outdated material and all shelf placement and merchandising.

Recently, BPC has actively sought growth in the mass merchandise segment because of the perceived profit potential. However, while the company is acutely aware of overall business profitability, there has never been an analysis on a customer segment basis.

BPC most recent income statement

Income net sales: 17,710,000

cost and expenses: 11,359,000

cost of goods sold: 5,312,000

Marketing, Sales, Logistics and Other expenses: 16,771,000

Earnings before income taxes: 939,000

Cost Category/Segment	Grocery	Drug	Mass Merchandise
Stocking Cost ($/Delivery)	$25	$20	$50
Delivery Cost ($/Delivery)	$30	$30	$55

All deliveries were store direct with 2 deliveries to grocery stores-1 delivery per week to drug stores- 3 deliveries per week to mass merch stores. Standard route trucks were used for drug and grocery store & extended vehicles were used to help accommodate higher volume.

*Complete chart holes with _____

B) Explain why or why not BCPI should consider the changes desired by Vast Savings Stores. Use the findings from the financial report above AND 1-2 sentences commenting on the changes requested by Vast Savings Stores.