Question

In an effort to increase the number of shoppers coming into its stores and the length of time those shoppers stay, Kohl’s (KSS (Links to an external site.)) is adding a small café (Kohl’s Café) to each of two of its department stores in the Milwaukee, Wisconsin area. Each café will sell Caribou Coffee items including lattes, cappuccinos, and other coffee items. Granola bars, chips, cookies, and other grab-and-go snacks will also be available. These cafés are experimental at this point; Kohl’s has no plans to add the cafés to other stores.

Questions

1. What type of responsibility center would the Kohl’s Café within a given store be (cost center, revenue center, profit center, or investment center)?
2. What costs do you think could be traced directly to a café in a given store?
3. Assume that Kohl’s wants to evaluate the profitability (performance) of a café within a given store. What, if any, costs should be allocated to the café? Explain your answer.

Answer 1

Kohl’s Cafe would be a cost center. It is installed within the department store to increase the customer footprint so that sales can be generated in the department. The department has to bear the cost of the cafe in its departmental overhead budget. Also this cafe is on experimental basis and not implemented on large scale basis to evaluate it as a revenue center or as a profit center. Unless it is implemented on a large scale basis and across stores it cannot be evaluated as revenue center or profit center

The costs that can be directly tracked to a cafe within a given store are

· Cost of inputs – coffee power, milk, water etc

· Cost of purchased items for resale- chips, cookies and other grab and go snacks

· Other operating costs like – electricity, depreciation of the machine, etc

The Cafe will be within the main departmental stores and following costs of the departmental stores can be allocated to it

· Maintenance cost

· Supervisor charges

· Department security charges

· Buildings depreciation

To evaluate the profitability of a cafe it has to be treated as profit center and cost allocation is necessary to reflect its true cost. Hence some of the departmental overheads costs will get allocated based on the allocation base and rates. For example: Buildings deprecation is allocated based on square feet.