- 18 -
Store Computed % Applied % % Applied
201 -1.08 shrinkage -1.08 Computed
397 -3.90 shrinkage -3.85 Ceiling
531 -0.27 shrinkage -1.00 Floor
782 +0.32 overage -1.40 Floor
Sam's consistently determined shrinkage projections for
its clubs by multiplying a fixed rate of .2 percent by monthly
sales. None of the clubs, including new clubs, applied a floor
or ceiling percentage limitation to the .2-percent rate. The
.2-percent rate was determined by petitioner's senior management
on the basis of their analysis of historical results from
warehouse operations. Sam's shrinkage estimates are a smaller
part of overall annual shrinkage because Sam's warehouse format
allows it to continuously take item physical inventories in
addition to taking complete physical inventories twice a year.
Sam's underestimated shrinkage. Sales during the physical
inventory cycle for Sam's, expressed in thousands of dollars,
were $597,954 for 1985 and $1,314,344 for 1986. Shrinkage during
the physical inventory cycle for Sam's, expressed in thousands of
dollars, was $567 for 1985 and $4,669 for 1986. Sam's shrinkage
as a percentage of sales for the physical inventories taken
during 1985 and 1986 was .27% (($567 + $4,669)/($597,954 +
$1,314,344)).
D. Adjustment of Monthly Estimates
Petitioners adjusted their inventory accounts to reflect
the results of each physical count of a store or club. Each time
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