Tammy’s Sandwiches (30 points)
Tammy’s Sandwiches operates a fast-casual sandwich chain in the Seattle area. The company’s first location, Greenwood, was opened in 2018. The Ballard and Bellevue locations followed suit in 2019. Operations are heavily decentralized and store managers are evaluated on their return on investment (ROI) with corporate expecting them to achieve at least a 20% ROI. (As explained below, Tammy's calculates ROI as the controllable margin of the store in a period divided by the total assets at the end of the period.) The company is considering changing their performance evaluation system to an EVA approach. Data for 2021 is provided below:
Ballard
Greenwood
Bellevue
Total
Revenues
$3,683,000
$4,150,000
$3,130,000
$10,963,000
Variable Food Costs
$1,415,504
$1,611,000
$1,264,000
$4,290,504
Gross Profit
2,267,496
2,539,000
1,866,000
6,672,496
Variable Labor Costs
$991,200
$913,000
$688,600
$2,592,800
Variable Advertising (5% of Revenues)
$165,735
$186,750
$140,850
$493,335
Manager Salary
$100,000
$120,000
$132,000
$352,000
Controllable Expenses
1,256,935
1,219,750
XXXXXXXXXX,450
3,438,135
Controllable Margin
1,010,561
1,319,250
XXXXXXXXXX,550
3,234,361
Rent
$350,000
$380,000
$360,000
$1,090,000
General Admin
$500,350
$629,500
$323,900
$1,453,750
Corporate Overhead
$0
$0
$0
$175,000
Total Non-Controllable Expenses
XXXXXXXXXX,350
1,009,500
XXXXXXXXXX,900
2,718,750
Operating Profit
XXXXXXXXXX,211
XXXXXXXXXX,750
XXXXXXXXXX,650
XXXXXXXXXX,611
Interest
XXXXXXXXXX,000
Taxes
49,122
Net income
196,489
Net book value at 2021 year-end:
Cu
ent assets
$970,000
$850,000
$600,000
2,420,000
Long-term assets
3,675,000
4,802,000
3,205,000
11,682,000
Total assets
4,645,000
5,652,000
3,805,000
14,102,000
Cu
ent liabilities (non-interest bearing)
330,000
265,000
184,000
779,000
Long-term debt
-
-
-
4,500,000
Stockholders' equity
8,823,000
Total liabilities and equity
14,102,000
Weighted average cost of capital (WACC)
8%
The company cu
ently bo
ows at 6% per year on its long-term debt and pays a 20% tax rate on income.
Required:
1.) For each of the stores, calculate 2021 ROI using controllable margin as the numerator measure of income and total assets at year-end as the denominator measure of investment. (3 points)
2.) During a metro-wide managers meeting, Michael Scott, the company’s financial controller suggests using “cu
ent cost” accounting to calculate the ROI saying “Inflation is here, lease costs in the Seattle Metro have gone up almost 15% from last year. We should revalue the long-term assets on the balance sheet, which mainly consists of the capitalized lease assets, to reflect what it would take in investment to operate this business if we started today”. Suppose Tammy’s Sandwiches adjusts the long-term assets (assumed to be all capitalized leases) on the balance sheet upwards by 15% as he suggests:
a) What is the new ROI for all three locations and what effect would this accounting change have on the 2021 ROI for the three stores? (3 points)
) If store manager bonuses are conditional on achieving the 20% ROI earmarked by corporate, which manager would be most strongly opposed to this change? Briefly explain. (2 points)
3.) a) Assume that Tammy’s did not go along with the change suggested in Question 2.
Tammy’s believes advertising provides benefits over 4 years and therefore for EVA purposes should be amortized on a straight-line basis over a 4-year useful life (beginning with the year of the expenditure). Similarly, the organization prioritizes training and expects the benefits to persist over a 3-year useful life. Advertising and training expenses incu
ed in the years 2018 through 2021 are as shown below:
2018
2019
2020
2021
GAAP Advertising Expense
$ 220,100
$ 392,500
$ 455,105
$493,335
Training Costs
$101,200
$103,540
$119,843
$129,640
Calculate 2021 EVA for Tammy’s Sandwiches. Calculate the 2021 Income statement and Balance Sheet adjustments related to advertising and training expenses. Clearly show and label the income effect (i.e., the net adjustment to NOPAT) and the balance sheet effect (i.e., the adjustment to invested capital) in your calculations (12 points)
4.) Tammy’s is considering a capital investment to upgrade the kitchen layout and install cold rooms in all three locations. The upgrades are expected to cost $840,000. The resulting annual cost savings is expected to increase operating profit by $120,000. Should Tammy’s go ahead with the investment if performance evaluation is based on EVA? Show your analysis (6 points)
5.) a) The board of directors is struggling to decide how to set the parameters of a performance evaluation system based on EVA for all locations. In the interest of fairness, they are considering setting the target EVA for all three locations at the same level, $30,000. Write a
ief paragraph (no more than 2 or 3 sentences) to advise the board on the proposed target EVA. (2 points)
) Would you recommend that Tammy’s Sandwiches change their performance evaluation system to focus on EVA or continue to focus on ROI for evaluating the performance of the three stores? Explain. (2 points)
Tammy’s Sandwiches II (20 points)
Tammy Rogers believes that the key to financial success in the healthy fast-casual segment is to offer the best quality products at the lowest costs. At the beginning of 2021, Tammy’s Sandwiches introduced a new and unique strategy called “Deliciously Quick”.
This strategy was targeted at the young, u
an working professional in the Seattle area. As she put it, “I believe this strategy will play well with the u
an young adult market. This demographic has high standards, needs more healthy eating options and at the same time they are so productivity-focused that we need to get them in and out quickly”.
Tammy’s Sandwiches planned to increase quality, as well as yield and lower costs by reducing defects in the food preparation process, reducing waste, and training workers regularly - encouraging them to seek real-time feedback and document improvements to their processes.
Despite previous work in standardizing the kitchen operations, a significant amount of Tammy’s high material costs comes from e
ors in the preparation process that result in products that cannot be sold or perishable inventory overstocks.
Tammy’s expects that higher yields and reduced inventory held will lower some costs. The higher yields will also allow Tammy’s to reduce the inventory waste associated with e
ors and stale inventory e.g., by implementing Just-In-Time (JIT) delivery with a key vendor. This could lead to problems with stockouts down the road. Alternatively, Tammy’s could maintain its cu
ent inventory process but produce and sell more quickly.
Tammy’s Sandwiches’ balanced scorecard for the just-completed fiscal year 2021 is as follows:
Objective
Measure(s)
Target Performance
Actual Performance
Financial Perspective
Increase shareholder value
Increase in operating income due to reduced defects and higher yields
$ 1,000,000
$ 800,000
Increase in operating income due to increased sales volume
$ 750,000
$ 525,000
Customer Perspective
Increase market share
Share of Seattle healthy fast-casual restaurant market
3%
1.6%
Internal-Business-Process Perspective
Improve food preparation process
Yield
82%
86%
Reduce food preparation time to customers
Order wait time
6 minutes
9 minutes
Learning-and-Growth Perspective
Develop process skills
Percentage of employees trained in process and quality management
90%
94%
Enhance information system capabilities
Percentage of organizational and food preparation processes with real-time feedback
85%
88%
Required:
1.) Based on results in the balanced scorecard above, do you think Tammy’s was successful in implementing its strategy in 2021? Explain. (6 points)
2.) Is Tammy’s balanced scorecard useful in helping the company understand why it did not reach its target market share in 2021? If it is, explain why. If not, explain what other measures you might want to add under the customer perspective and why. (4 points)
3.) Should Tammy’s have included some measure of employee satisfaction in the learning-and-growth perspective and/or a measure of employee efficiency in the internal-business-process perspective? That is, do you think employee satisfaction and efficiency are critical for Tammy’s to implement its strategy? (4 points)
4.) What issues do you see in Tammy’s strategy to improve quality and reduce costs? (2 points)
5.) How can Tammy’s tell from their results the difference between a bad strategy or a bad implementation or a good strategy? (4 points)
Tammy’s Sandwiches III (32 points)
Greg Forman, general manager of the Ballard location, knew that morning when he got the call from Tammy Rogers (the founder of Tammy’s) that his day was going to be a busy one. Tammy was asking for explanations for some of the production variances she observed in last year’s performance report. She expected Greg to explain his variances and suggest ways of improving performance and was hoping to receive his report in a few hours.
According to Thrillist, Tammy’s is the go-to sandwich store in the Seattle area. Since its founding in 2018, the fast-casual restaurant only serves two types of sandwiches: the “Surf-n-Turf” which sells for $8.95 and the “Fish-n-Fowl” which sells for $7.50. Cu
ently, it takes 0.15 direct labor hours (9 minutes) to make any of the sandwiches. Ingredient lists from the recipes for the two sandwiches are:
The Fish-n-Fowl:
· 0.25 lbs. of tuna fish salad
· 0.50 lbs. of sliced turkey
· 2 slices of pumpernickel
ead
The Surf-n-Turf:
· 0.40 lbs. of sliced roast beef
· 0.35 lbs. of tuna fish salad
· 2 slices of pumpernickel
ead
Tammy’s gets all its meats and
eads from Luciano’s Wholesale Restaurant Supply. The high quality of Luciano’s ingredients as well as the unique sandwich recipes are part of what makes Tammy’s