Question

Hebert’s Variety Store has four departments: men's, women's, children's, and electronics. The following information is provided:

	Men's			Women's			Children's			Electronics
Floor space		10,000	sq. ft.		20,000	sq. ft.		8,000	sq. ft.		2,000	sq. ft.
Sales	$	35,000		$	75,000		$	20,000		$	12,000

The company's accountant needs to allocate the store's annual rent of $160,000.

Required:

1) Compute the allocation rate that should be used to allocate the rent cost to the four departments.

2) Compute the amount of rent that should be allocated to each of the four departments.

3) Currently, the managers are paid a bonus based on sales. As you can see from the above table, the women's department manager will receive the largest bonus. Do you believe this bonus plan is fair to all four department managers? Why or why not?

Answer 1

1. Rent Should be allocated based on floor space used by each four departments.

Hence, allocation rate = 10,000: 20,000 : 8,000 : 2,000: = 5:10:4:1 (Men: Women: Children : Electronic)

2. Amount of rent allocation :

Department	Ratio	Rent
Men	5	40,000
Women	10	80,000
Children	4	32,000
Electronic	1	8,000
Total	20	1,60,000

3. Currently Manager are paid bonus based on Sales.

This bonus plan do not seems to be fair for mangers of all four departments because :

- Three departments are realted to cloth industry. Howerver one department work in electronic industry. So, It cannot be compared directly.

- Space allocated to each department are also not same.

- It is also not clear that investment are same or not in each department.

- Generally demand of women clothe are high compared to other clothes.