Please see attached assignment for completion.
Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. © 2022, Chartered Professional Accountants of Canada. All Rights Reserved. Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA » sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada. © 2022 Comptables professionnels agréés du Canada. Tous droits réservés. 2021-10-13 Performance Management — Practice Case 6 Case (120 minutes) David Zey established Zey Super Foods Inc. (ZSF), a grocery store, 20 years ago in the rural town of Carstairs, Alberta, just north of Calgary. As his business grew, David opened two more stores in the neighbouring towns of Didsbury and Olds. Today is March 30 and you, CPA, have been hired by David to provide consulting advice on a number of issues he is concerned about. ZSF has managed to generate strong profits for a number of years. Selling groceries at a reasonable price and offering quality service allowed ZSF to build a strong base of loyal clients. In addition, David attributes his success to keeping store spaces smaller, which increases shopper efficiency and keeps overhead down. His customers appreciate a boutique shopping experience and the ability to buy local and organic products, for which demand is increasing. However, in recent years, ZSF has experienced increasing competition from larger chains that are able to offer lower prices. As a result, customers have become very price sensitive and cost management has become extremely important. David is concerned about the future profitability of the company, including its strengths, weaknesses, opportunities, and threats. Beyond that, he wants to know what the company’s key success factors are and how he can measure the company’s performance against these factors. In particular, he is wondering which factors he should primarily focus on to ensure long-term viability of the company. Performance Management — Practice Case 6 Case 2 / 5 David relies on his two sisters and one brother-in-law to manage the three stores. He appreciates being able to take a step back from the business and empower his family to manage the individual stores. However, this has been causing some tension in the family, as his one sister doesn’t believe she is being fairly compensated. David would like advice on setting up a performance evaluation system. He provided information on the organization to assist you (Appendix I). In recent years, Carstairs has become a commuter town for Calgarians. To take advantage of the new growth, the town of Carstairs has approved the development of a new residential subdivision, Riverbend, which also includes a commercial centre. The developer would like a national grocery chain to open in the centre, but the town council has insisted that ZSF, as a locally-owned merchant, be given right of first refusal for the space. David would like you to analyze this opportunity and provide advice on whether to proceed (Appendix II). Your response should be no longer than 3,600 words, excluding any Excel files. Performance Management — Practice Case 6 Case 3 / 5 Appendix I Organizational information David provided the following information for the December 31 fiscal year end: Location Carstairs Didsbury Olds Industry average* Store managers Jack Shepherd (David’s brother-in-law) Jennifer Shepherd (David’s sister) Janice Zey (David’s sister) Annual sales $2,650,200 $5,877,400 $2,316,000 $6,000,000 Net income $50,020 $100,105 $51,280 $139,800 Population 4,077 9,184 5,268 N/A Retail space 1,251 m2 3,130 m2 912 m2 2,000 m2 Inventory turnover 17.99 15.57 13.56 18.24 Fixed indirect cost variance (1,199) (1,543) 1,443 425 Employee turnover 54% 49% 23% 30% *Industry average of independent stores The store managers are given free rein to manage their stores. David sets the markup on the grocery items, but the managers are responsible for all other aspects of the business, including sales and discounting items. David pays each manager $100,000/year as a salary. Three years ago, at the urging of Jack, David implemented a simple bonus structure, offering the managers a bonus based on a percentage of sales. Lately, David has found that in spite of increasing sales, ZSF’s net income isn’t growing at the same rate. He expected some contraction in profits due to pressure from competition, but the decline is worse than he expected. In addition, when examining information from his customer loyalty program, ZSF seems to be losing some of its repeat customers. He isn’t sure why this is happening and would appreciate your insights. Recently Janice came to David with concerns about her bonus. She explained that she is working harder than Jack and Jennifer but is receiving a smaller bonus and didn’t believe this was fair. David agrees that the bonus system needs to be revised, especially with the potential of a new store opening. However, he isn’t sure what to do. He wants the bonus to incentivize his managers to work toward the key success factors that have made his business a success. He is wondering how he can get the managers to balance all factors of the business (and not just focus on the financial aspects, or just on sales). Performance Management — Practice Case 6 Case 4 / 5 Appendix II Riverbend opportunity Lease agreement • The lease agreement for this store will be 30 years, and annual lease costs are expected to be $175,000. • An upfront payment of $25,000 is required to cover ZSF’s share of costs incurred to promote the centre’s opening. • Initial leasehold improvements are expected to be $125,000. • The space is 4,500 square metres. Sales probabilities The Riverbend developer predicts that the subdivision will largely be populated by people who currently work and live in Calgary. The demographics are expected to include young families and couples. They are often health conscious but are used to shopping in large big box stores in Calgary neighbourhoods. Year 1 projected sales for this new store vary depending on whether residents change their preferred shopping location from Calgary to Riverbend. The probability of residents immediately changing their preferred shopping location to the Riverbend store is estimated to be 60% (with 40% probability that they will continue to shop in Calgary before or after work). If all residents were to change their shopping location to the Riverbend store, revenues are estimated to be $8,000,000. It is expected that sales will increase by 5% each year for the next five years. To increase customer acceptance of the shopping centre, the developer has been trying to entice a high-profile department store chain to open a store in Riverbend. The customer appeal of such a department store is expected to cause the projected sales for the centre’s grocery store to increase by 10%. Unfortunately, similar new shopping centres have only had a 35% success rate in attracting a high-profile department store. Cost information David believes that the gross profit margins and variable cost relationships for the Riverbend store would be similar to the Didsbury store. David evaluates return by using ZSF’s WACC of 6%, and an effective tax rate of 25%. In addition, he believes the fixed costs (aside from lease costs provided above) will be proportional to the Didsbury store. David estimates fixed costs will increase by 2% per year, excluding the lease for the new premises. Performance Management — Practice Case 6 Case 5 / 5 Appendix II (continued) Riverbend opportunity Results from the Didsbury location for the December 31 fiscal year end are as follows: Sales $ 5,877,400 Cost of sales 4,643,146 Gross profit 1,234,254 Fixed operating and occupancy expenses: Wages 302,452 Advertising 52,425 Administration 98,000 Rent — building 115,300 Garbage removal 46,250 Insurance 20,500 Repairs and maintenance 21,500 Utilities 53,000 Total fixed operating and occupancy expenses 709,427 Variable operating and occupancy expenses: Wages 393,380 Grocery bags, packaging supplies, delivery 16,250 Total variable operating and occupancy expenses 409,630 Earnings before interest and taxes $ 115,197