(Sales and profit improvement) Bold and Brassy is a retail organization that sells upscale clothing to professional women in the Northeast. Each year, store man- CASES agers, in consultation with their supervisors, establish financial goals, and then actual performance is captured by a monthly reporting system.

One sales district of the firm, District A, contains three stores. This district has historically been a very poor performer. Consequently, its supervisor has been searching for ways to improve the performance of her three stores. For the month of May, the district supervisor has set performance goals with the man¬ agers of Stores 1 and 2 who will receive bonuses if certain performance measures are exceeded. The manager of Store 3 decided not to participate in the bonus scheme. Because the district supervisor is unsure what type of bonus will en¬ courage better performance, the manager of Store 1 will receive a bonus based on sales in excess of budgeted sales of $570,000, and the manager of Store 2 will receive a bonus based on net income in excess of budgeted net income. The company’s net income goal for each store is 12 percent of sales. The budgeted sales for Store 2 are $530,000.

Other pertinent data for May follow:

* At Store 1, sales were 40 percent of total District A sales, whereas sales at Store 2 were 35 percent of total District A sales. The cost of goods sold at both stores was 42 percent of sales.

■ Variable selling expenses (sales commissions) were 6 percent of sales for all stores and districts.

* Variable administrative expenses were 2.5 percent of sales for all stores and districts.

■ Maintenance cost includes janitorial and repair services and is a direct cost for each store. The store manager has complete control over this outlay; how¬ ever, this cost should not he below 1 percent of sales.

* Advertising is considered a direct cost for each store and is completely under the control of the store manager. Store 1 spent two-thirds of District A’s total outlay for advertising, which was ten times more than Store 2 spent on advertising.

* The rental expenses at Store 1 are 40 percent of District A’s total, whereas Store 2 incurs 30 percent of District A’s total.
* District A expenses are allocated to the stores based on sales.

a. Which store, Store 1 or Store 2, would appear to be generating the most profit under the new bonus scheme?

b. Which store, Store 1 or Store 2, would appear to be generating the most revenue under the new bonus scheme?

c. Why would Store 1 have incentive to spend so much more on advertising than Store 2?

d. Which store manager has the most incentive to spend money on regular maintenance? Explain.

e. Which bonus scheme appears to offer the most incentive to improve the profit performance of the district in the short term? Long term?
(CMA adapted)LO1