Question

This is a national chain of clothing stores. They are currently thinking about closing one of their stores because of

continuing losses. The most recent annual income statement is given below.

Net sales

2,215,000

Cost of goods sold

1,465,000

Gross margin

750,000

Expenses:

Manager salary

65,000

Asst Manager salary

35,000

Sales staff salaries

230,000

Sales commissions

221500

Rent

54300

Utilities

24,000

Advertising

90,000

Maintenance

36,000

General overhead

80,000

835,800

Net loss

-85,800

The manager's salary is set by her boss, the regional manager, consistent with pay levels in the corporation. She hired the assistant manager to help with administrative and

marketing details. Maintenance is handled by an outside contractor hired by the manager, which sends a crew in daily after hours. Sales staff are paid wages and commissions

consistent with company policy. Rent is a small fixed charge plus a percent of sales. Advertising consists of local advertising ($40,000) purchased by the manager,

plus $50,000 allocated from national advertising campaigns. General overhead is an allocation of regional and national administrative costs.

Of these, $8,000 reflect accounting and HR costs incurred because of the Greeley store.

The store lease was negotiated by the national office. There are ten years left on the lease.

a)

Assuming that the current year is typical of recent years, should Lucille's close the Greeley store? Explain, with relevant

calculations as appropriate.

b)

In evaluating manager performance, which costs should be considered controllable by her? Explain briefly.

Answer 1

Answer-a)

Irrelevant cost outside the control of Greeley's store = 50000 from national advertising campaign + (General Overhead of 80000 - 8000 HR and accounting cost incurred by Greeley's store) = 50000 + 72000 = 122000

This 12200 will anyways have to be spent, even after cosing greeley's store.

Thus,By continuing greeley's store , company is incurring 85,800 loss but by shutting it down it will make even bigger loss of 122000. Thus, it doesn't make sense to close greeley's store.

Answer-b)

Cost which are controllable by the manager :-

1. Salary of assistant manager as assistant was hired by the manager. e.g. manager can make his assistant redundant by assuming his tasks and save entire salary of 35000. or link assistant's salary with sales and make it variable and more controllable.

2.Salary of contractors can be controlled as contractors are hired by the manager.

3.Local advertising cost of 40000 can be controlled by manager as it gets spent on his discretion.

Please note, manager cannot control fixed overheads such as rent, untilities, accounting/HR expense. He also cannot control the expenses incurred by the regional manager such as his own salary. He cannot change company policy regarding payment of sales staff . So, salary and commision of sales staff is also uncontrollable cost.