Question

Lanier Company manufactures expensive watch cases sold as souvenirs. Three of its sales departments are Retail Sales, Wholesale Sales, and Outlet Sales. The Retail Sales Department is a profit center. The Wholesale Sales Department is a cost center. Its managers merely take orders from customers who purchase through the company’s wholesale catalog. The Outlet Sales Department is an investment center because each manager is given full responsibility for an outlet store location. The manager can hire and discharge employees, purchase, maintain, and sell equipment, and in general is fairly independent of company control.

Mary Gammel is a manager in the Retail Sales Department. Stephen Flott manages the Wholesale Sales Department. Jose Gomez manages the Golden Gate Club outlet store in San Francisco. The following are the budget responsibility reports for each of the three departments.

Budget
			Retail Sales			Wholesale Sales			Outlet Sales
Sales			$   750,000			$   400,000			$   200,000
Variable costs
	Cost of goods sold		150,000			100,000			25,000
	Advertising		100,000			30,000			5,000
	Sales salaries		75,000			15,000			3,000
	Printing		10,000			20,000			5,000
	Travel		20,000			30,000			2,000
Fixed costs
	Rent		50,000			30,000			10,000
	Insurance		5,000			2,000			1,000
	Depreciation		75,000			100,000			40,000
Investment in assets			1,000,000			1,200,000			800,000

Actual Results
			Retail Sales			Wholesale Sales			Outlet Sales
Sales			$   750,000			$   400,000			$   200,000
Variable costs
	Cost of goods sold		192,000			122,000			26,500
	Advertising		100,000			30,000			5,000
	Sales salaries		75,000			15,000			3,000
	Printing		10,000			20,000			5,000
	Travel		14,000			21,000			1,500
Fixed costs
	Rent		40,000			50,000			12,300
	Insurance		5,000			2,000			1,000
	Depreciation		80,000			90,000			56,000
Investment in assets			1,000,000			1,200,000			800,000
Determine which of the items should be included in the responsibility report for each of the three managers.			Compare the budgeted measures with the actual results. Decide which results should be called to the attention of each manager.

Answer 1

Mary Gammel manager of retail sales	Profit center	Responsible for improving profitability.
Stephen Flott manager of Wholesale Sales Department	Cost center	Responsible for minimizing cost of the items and operational costs.
Jose Gomez manager of outlet store	Investment center	Responsible for generate positive results with minimum investment.

	Budgeted			Actual
	Retail	Wholesale	Outlet	Retail	Wholesale	Outlet
Sales	$750000	$400000	$200000	$750000	$400000	$200000
Variable costs;
Cost of goods sold	$150000	$100000	$25000	$192000	$122000	$26500
Advertising	$100000	$30000	$5000	$100000	$30000	$5000
Salaries	$75000	$15000	$3000	$75000	$15000	$3000
Printing	$10000	$20000	$5000	$10000	$20000	$5000
Travel	$20000	$30000	$2000	$14000	$21000	$1500
Total variable costs	$355000	$195000	$40000	$391000	$208000	$41000
Fixed costs;
Rent	$50000	$30000	$10000	$40000	$50000	$12300
Insurance	$5000	$2000	$1000	$5000	$2000	$1000
Depreciation	$75000	$100000	$40000	$80000	$90000	$56000
Total fixed costs	$130000	$132000	$51000	$125000	$142000	$69300
Profit	$265000	$73000	$109000	$234000	$50000	$89700
Percentage (%)	35.33%	81.75%		31.2%	87.5%

1. As we know that retail is the profit center and actual profit is reduced from budgeted hence focuss must be given here to manage costs so that profitability can be maintained as per budgeted standards.

2. Wholesale is cost center and as per actual data it is clear that actual costs have been increased thus manager should focuss to minimizing the costs.

3. Actual and budgeted investment is same. So there is no deviation.