Wegmans, a privately owned regional supermarket chain founded in Rochester, New York, in 1916, focuses on the more affluent market by providing a unique shopping experience and value. Wegmans' much larger stores stock roughly twice as many items as other supermarkets and offer more displays of fresh produce, artisan breads, fresh seafood, and take-out or in-store dining of restaurant-quality entrees. The company currently operates more than 80 stores and 10 regional distribution centers in five states stretching from New York to Virginia. Their most recent expansion is into Virginia with three new stores and a new Wegmans Virginia distribution center serving the three new stores, but with capacity to serve more Virginia stores as they are opened.

As Wegmans expands geographically, it must open regional distribution centers that are responsible for accurate and on-time selection, inventorying, and delivery of the thousands of products (fresh produce, meats, seafood, frozen goods, etc.) sold in the stores in that distribution center's region. Each store in the region is allocated a share of the costs of its distribution center based on total store revenues served by the distribution center.

Senior management uses residual income to evaluate the performance of each store (and reward store management). All Wegmans stores face the same weighted-average cost of capital (13 percent) applied to direct investment in each store (working capital and property, building, and fixtures). The following table summarizes last year's operations of the newest Virginia store (Virginia 3), Wegmans flagship store (Rochester 1), and the Wegmans store with median revenues across the entire 80-store chain (Median). Virginia 3's results in the table represent the first complete year of operations since opening the store. "Rochester 1" is Wegmans' first megastore, rebuilt and expanded in 1990, with a very large and loyal customer base. All figures are in thousands of dollars.

*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 center.
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 management evaluating the performance of Virginia 3 relative to Rochester 1 and to the Median store. Be sure to provide credible explanations for all material differences in performance between Virginia 3 and the other two Wegmans stores?

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Last Year Virginia 3 Rochester 1 (000s) Median Working capital* Revenues Property, building, and fixtures' Cost of goods sold Store administration Distribution center charges $1,100 $1,500 $1,300 59,300 58,300 41,510 110,250 28,740 74,970 8,820 4,900 44,000 48,300 6,300 3,900 5,930 5,100