Question

Answer the following questions based on the May Segmented Income Statement and Net Income, using data below. • What are the key factors (both financial and strategic) that Cathy's Classic Clothes should consider in its evaluation of the proposed bonus plans for Boston and New Haven? Why are these factors important? What is the expected impact, under the proposed bonus structures (including the opt- out of the Portland manager), on your managers' behavior? What is the expected impact, under the proposed bonus structures including the opt- out of the Portland manager), on the financial results for the 3 individual stores, and for the Coastal District as a whole? From a strategic perspective, what are the advantages and disadvantages to implementing multiple different bonus plans (as opposed to one, unified plan)? What are some next steps that you, as the Coastal District Manager, will take, after implementing these plans for the month of May? May Segmented Income Statement $ ELITE CLASSIC CLOTHES: NEW ENGLAND REGION Segmented Income Statement For May Coastal New Haven District Store Sales $ 1,560,000 $ 546.000 Cost of goods sold 635,850 218,400 Gross margin $ 924,150 $ 327,600 Operating expenses: Variable selling $ 93,600 $ 32,760 Variable administrative 39,000 13,650 Boston Store 468,000 187, 2007 280,800 $ $ 28,080 11,700 Other direct expenses: Store maintenance Advertising Rent and other costs ✓ 12,100 75,000 180.000 7,200 50,000 54.000 800 6,250 36,000 ✓ Indirect expenses: District general administrative expenses Regional general and administrative expenses ✓ 185,000 156.000 64.750 52.000 55,500 52.000 Total expenses Operating income S $ 740,700 183,450 $ $ 274,360 53,240 $ $ 190,330 90,470 Portland store's Net Income for May: $10,360

Answer 1

Ans 1 - Boston seems to be generating healthy revenue with low "Other direct expense". This expense is only 9.2% of Sales for Boston whereas it is a whopping 20% for New Haven . Hence the Operating Income of NH is only 9.75% of Sales whereas Boston stands at 19% of Sales a huge gap.   Hence while considering bonus Boston should be given a higher bonus % as they have produced much better margins than the two other stores whereas NH should be given the lower bonus for producing lower margin. Also once should strategically consider shifting some of the ODE of New Haven , store maintenance and advertising towards Boston. Possibly Boston can generate much higher sales  if they are given this additional support. If this is done then overall Classic Clothing will make better profits without any additional expenses  

On the second part it seems to suggest that Portland is the 3rd store and the manager is opting out presumably for the lowest profitability . So if this manger opts out it may lead to concerns about who will manage the Portland store and how.

Expected bonus structure should be in line with business performance. If Portland opts out the bonus accruing to him maybe reinvested in his business the following year .

From a strategic perspective bonus payments should be differentiated based on performance. This should lead to healthy competition  among managers leading to higher sales and income

Future steps for me would be

Reduce advt expenses and store maintenance expenses for NH and allocate more for Boston

Reduce Rental payouts for Portland which is high

Check the Cost of Goods Sold expenses for Portland which is a couple of % higher than others.Possibly increase prices if expenses cant be curtailed.

In summary study all the expenses of Portland store under the microscope and focus on its turnaround