Outdoor World Inc. (OWI) 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 OWI 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 $6,875,000 and $5,625,000 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 cycles and running shoes. The breakdown of sales within the two stores is approximately 50 percent clothing and 50 percent cycles/shoes for Boston but is estimated to be 60 percent/40 percent for Hartford, due to the greater interest in cycling in the Boston area. OWI is interested in finding the profit contribution of clothing and cycling/shoes at the Hartford store but not at the Boston store.

Cost of purchases for resale averages 60 percent of retail value at Boston, and at Hartford the cost is 70 percent for clothing and 50 percent for cycles/shoes. Variable operating costs at each store are similar—30 percent of retail sales at Boston, and at Hartford operating costs are 25 percent of retail sales for the clothing unit and 35 percent for the cycle/shoes unit. OWI estimates it has a total of $1,075,000 fixed cost, of which $325,000 could not be traced to either store; of the remaining $750,000, $400,000 was traceable to the stores and controllable by store managers and $350,000 could be traced to the stores but could not be controlled in the short term by the store managers. These fixed costs are estimated to be traceable to the stores as follows.

Percent of

Fixed Controllable Costs Total Cost

Boston .................45%

Hartford total ...............40

Clothing .................50

Cycle&Run ...............30

Could not be traced to clothing or cycling

at Hartford ...............20

Could not be traced to Boston or Hartford ....15

Percent of

Fixed Noncontrollable Costs Total Cost

Boston .................40%

Hartford total ..............50

Clothing .................55

Cycle&Run ...............35

Could not be traced to clothing or cycling

at Hartford ...............10

Could not be traced to Boston or Hartford ...10

Required

1. Prepare a contribution income statement for OWI showing the contribution margin, controllable margin, and contribution by profit center for both the Boston and Hartford stores, and also for the clothing and cycles/shoes units of the Hartford store.

2. Interpret the contribution income statement you prepared in (1) above. What recommendations do you have for the management of OWI?