risk taking and insurance A major retailer, at one time, moved toward mare centralized buying of merchandise that would be inventoried by its many locations. Each such location was evaluated in terms of profit eamed at that location. To account for the overhead costs of centralized buying, the retailer booked the centrally purchased merchandise at each store according to the formula of invoice pius t%. With t at 10, for example, an item costing 1,000 would be "sold" by center to the retail outlet for 1,100.

The retail managers were not totally pleased with some of center's merchandising decisions, and complained that, at times, they were stuck with merchandise that could not be sold. The retailer dealt with this by allowing, upon approval, a markdown.

To illustrate, suppose the above noted 1,000 item was initially listed at 1,600 retail, but marked down 400. Suppose it sells for 1,600 - 400 = 1,200. The retail manager is now credited with 1,600 in revenue and the sOOrtfall of 400, the markdown, is debited to the above noted centralized buying overhead account.

What tensions are created by the move toward mare centralized purchasing in this case? Howare some of these tensions ameliorated by the markdown arrange ment? What are the Iikely consequences? What do you suspect will happen to the percentage t as time goes on?

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