Question

Sally's a national chain of clothing stores. They are currently thinking about closing their Phoenix, Arizona store 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

a. Revised profitability workings			Analysis for Answer   a.	b. Manager Evaluation & costs controllable by her
Net sales		2,215,000
Cost of goods sold		1,465,000
Gross margin		750,000	Contribution from the store towards meeting its fixed costs
Relevant Expenses:
Manager salary	65,000		Specific to the store	Self-salary	65,000
Asst Manager salary	35,000		Specific to the store	Controllable by the manager	35,000
Sales staff salaries	230,000		Specific to the store	Not Controllable by the manager-as fixed as per Company policy
Sales commissions	221500		Specific to the store	Not Controllable by the manager-as fixed as per Company policy
Rent	54300		Specific to the store	Not Controllable by the manager as negotiated by national office
Utilities	24,000		Specific to the store	Controllable by the manager	24,000
Advertising	40,000		Allocated costs-50000	40000 controllable by manager--Manager has no control over allocated costs	40000
Maintenance	36,000		Specific to the store	Controllable by the manager--contractor hired by manager	36,000
General overhead	8,000		Allocated costs-72000	8000 is controllable by manager	8000
Total expenses		713,800			208,000
Net Income		36,200

a. As per the workings above, the store is seemingly making losses due to the allocated costs ---$ 50000 towards advertising & $ 72000 in General Oh expenses.When these amounts are added back ,the store shows a net income of $ 36200.

So, the store need not /should not be closed.

b. Done in last 2 columns.

$ 208000 of the costs can be condsidered to be controllable by her, as explained individually.

Allocated,ie. Handed-down costs (by the head-office) cannot be controlled by the manager at the local office.She is responsible and can cut down/control only those costs over which she can exercise her authority to decide the necessity as well as the amount.