Question

Deborah's is a national chain of clothing stores. They are currently thinking about closing their Knoxville, Tennessee 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 Knoxville 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 Deborah's close the Knoxville 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) If the store is closed, Deborah will be able to save all costs except $50,000 of advertising costs and $80,000 of general overhead because these costs are allocated to the store and not incurred by the store.

The calculations are as follows:

From the above calculations, it can be easily observed that if the store is closed, Deborah's overhead net income will further decrease by $44,200.

Therefore, the store close should not be closed.

Above figures have been calculated in the following manner:

(b)

Allocated costs are not controllable by the manager therefore $50,000 of advertising expense and $80,000 of general overhead should not be considered controllable by her. Remaining all costs are controllable by the manager.