Question

When a large Omaha Department store moved to a new location, Linda Butler was hired as the new shoe department manager. Harold Knox, who retired, had been the manager at the old location. Linda’s boss, Samantha Sanders, is concerned about the poor performance since Linda became shoe department manager. The new store location is much larger than the old store location - not all of the space is currently needed. The extra space is divided up among the various departments including the shoe department. Utilities and depreciation for the entire store are allocated based on the number of square feet in each department even though individual departments have no control or influence over these amounts.

	New Location		Old Location
Sales	800,000		400,000
Cost of Goods Sold	160,000		100,000
Gross Profit	640,000		300,000
Department Salaries	80,000		72,000
Other Department Costs	12,000		8,000
Allocated Utilities and Depreciation	388,000		20,000
Net Income	160,000		200,000

Samantha Sanders is the Manager of the entire store. In an Interview with Linda she states: "You are not doing nearly as good as your predecessor, Harold Knox. He had a 50% margin - you only have a 20% margin. He had $200,000 of income - you only have $160,000. You are not going to have much of a future here if you do not start to perform better."

Linda Butler is not the type of manager to back down from a fight. She said to the Store Manager: "Your figures are skewed by unreasonable data. I have control over my inventory costs, my department salaries and my other departmental costs.   In all of these areas by any reasonable measure, I am far surpassing the performance of my predecessor, Harold Knox. You should be paying me a bonus - you should not be threatening me!"

In your post, answer the question:  Who is Right?? Your post should justify your answer with supporting concepts and a report patterned after those in chapter 6.

Answer 1

Linda Butler is right and Samantha Sanders is wrong which can be evidenced by Net Income/Margin
without allocation of allocated utilities and depreciation over which new manager of shoe department,
Linda Butler, is really not having control. In short, allocated Utilities and Depreciation expenses are
uncontrollable for Linda Butler. The calulation of Net Income/Margin before allocation of allocated utilities
and depreciation is given below for your understanding.
		New Location	Old Location
Sales		800000	400000
Cost of goods sold		160000	100000
Gross profit		640000	300000
Gross margin ratio		80	75
Departmental Salaries		80000	72000
Other Departmental Costs		12000	8000
Net Income		548000	220000
Net Margin ratio		68.5	55
By above calculations, it can be proved that new manager, Linda Butler is doing far better than
its predecessor and really deserve bonus instead of threats from Samantha Sanders, a manager
of the entire store.
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