Segmented Income Statement; Responsibility Accounting
Show-off, Inc. sells merchandise through three retail outlets–in Las Vegas, Reno, and Sacramento- and operates a general corporate headquarters in Reno. A review of the company’s income statement indicates a record year in terms of sales and profits. Management, though, desires additional insights about the individual stores and has asked that Judson Wyatt, a newly hired intern, prepare a segmented income statement. The following information has been extracted from Show-Off’s accounting records:
● The sales volume, sales price, and purchase price data follow:
| Las Vegas | Reno | Sacramento |
Sales volume | 37,000units | 41.000 units | 46,000units |
Unit selling price | $1200 | $1 1.00 | $9.50 |
Unit purchase price | 5.50 | 5.50 | 600 |
● The following expenses were incurred for sales commissions, local advertising, property taxes, management salaries, and other noncontrollable (but traceable) costs:
| Las Vegas | Reno | Sacramento |
Sales commissions | 6% | 6% | 6% |
Local advertising | $11,000 | $22,000 | $48,000 |
Local property taxes | 4,500 | 2,000 | 6,000 |
Sales manager salary | – | – | 32,000 |
Store manager salaries | 31,000 | 39,000 | 38,000 |
Other noncontrollable costs | 5,800 | 4,600 | 17,800 |
Local advertising decisions are made at the store manager level. The sales manager’s salary in Sacramento is determined by the Sacramento store manager: in contrast, store manager salaries are set by Show -Off’s vice president.
● Nontraceable fixed corporate expenses total $92,300.
● The company uses a responsibility accounting system.
Required:
1. Assume the role of Judson Wyatt and prepare a segmented income statement for Show-Off.
2. Determine the weakest-performing store and present an analysis of the probable causes of poor performance.
3. Assume that an opening has arisen at the Reno corporate headquarters and the company’s chief executive officer (CEO) desires to promote one of the three existing store managers. In evaluating the store managers’ performance, should the CEO use a store's segment contribution margin, the profit margin controllable by the store manager, or a store’s segment profit margin? Justify your answer.
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