Question

Required information (The following information applies to the questions displayed below.) Cardio World Inc. (CWI) is a sporting goods retailer that specializes in bicycles, running shoes, and related clothing. The firm has become successful by careful attention to trends in cycling, running, and changes in the technology and fashion of sport clothing. In recent years, however, the profit margins have begun to fall, and CWI has decided to employ a contribution income statement to further analyze the company's profitability. The company has two stores, one in Hartford, Connecticut, and the other in Boston, Massachusetts. The total sales for the two stores for the most recent year are $7,025,000 and $5,875,000 for the Hartford and Boston stores, respectively. Both stores are considered profit centers, and within each store are two profit centers: one for clothing and the other for cycle and running shoes (called "cycle & run" below). The breakdown of sales within the two stores is approximately 50% clothing and 50% cycle & run for Boston but is estimated to be 60%/40% for Hartford due to the greater interest in cycling in the Boston area. CWI is interested in finding the profit contribution of clothing and cycle & run at the Hartford store but not at the Boston store. Cost of purchases for resale averages 60% of retail value at Boston; at Hartford, the cost is 70% for clothing and 50% for cycle & run. Variable operating costs at each store are similar: 30% of retail sales at Boston, and at Hartford, variable operating costs are 25% of retail sales for the clothing unit and 35% for the cycle & run unit. CWI estimates it has a total of $1,175,000 fixed cost, of which $325,000 cannot be traced to either store; of the remaining $850,000, $475,000 is traceable to the stores and controllable by store managers, and $375,000 can be traced to the stores but cannot be controlled in the short term by the store managers. These fixed costs are estimated to be traceable to the stores as follows:

Answer 1

Hatford Boston Grand Particulars Cycle & Run (in $) Cycle & Run (in S) Total Clothing in S) Clothing (in S) Total Total (in $) (in S) (in S) Sales 4,215,000 2,810,000 2,937,500 2,937,500 7,025,000 5,875,000 12,900,000 Less: Variable Cost Cost of Purchase 2,950,500 1,405,000 4,355,500 1,762,500 1,762,500 7,880,500 3,525,000 Variable Operating Cost Contribution 1,053,750 2,318,250 702,500 2,107,500 881,250 881,250 2,056,250 1,756,250 1,762,500 3,518,750 2,056,250 4,425,750 4,112,500 8,538,250 Less: Fixed Cost Traceable Fixed Costs Controllable Costs Traceable Costs 106,875 106,875 64,125 106,875 171,000 213,750 384,750 Common Fixed Costs at Hartord (Allocated Based on Traceable Costs ratio) 26,719 16,031 42,750 42,750 Common Costs for Hartford and Boston 13,300 (Allocated based on Traceable Costs Ratio) 13,300 13,063 7,838 26,600 20,900 47,500 Non Controllable Costs Traceable Costs 75,000 103,125 65,625 75,000 168,750 150,000 318,750 Common Fixed Costs at Hartord (Allocated Based on Traceable Costs ratio) 7,292 11,458 18,750 18,750 Common Costs for Hartford and Boston (Allocated based on Traceable Costs Ratio 12,146 8,813 7,729 8,813 17,625 19,875 37,500

Profit before Untraceable Fixed Cost 1,852,263 1,852,263 7,688,250 2,044,865 1,938,860 3,983,725 3,704,525 Untraceable Fixed Cost 325,000 Net Profit of CWI 7,363,250 Profit Margin 56.71 63.06
Recommendations:

1. CWI needs to gather accurate information in order to identify traceable costs

Interpretaion:

1. Sales of Hartford is higher and the profit is also higher when compared to Boston. However in terms of profit percentage, the position changes.