Blake and McGinley is a small family owned departmental store which does not employ a sophisticated form of management accounting. Although over the last few years the profits have been declining, this has not over-worried the owners. However, the most recent profit and loss account, for the 3 months to ended 31 December 2010, shows a loss of 68,700. (The summarised profit and loss account is reproduced as Appendix 1). This loss, coupled with a poor financial position has caused the owners to call an emergency meeting to discuss the situation. At the meeting the information contained in Appendix 2 was presented by the Company bookkeeper. One of the directors proposed that the best solution would be to close the restaurant and the toy department and to reduce selling prices in all other departments by 5% in order to stimulate increased sales by making prices more competitive with other stores.

APPENDIX 1

SUMMARY PROFIT AND LOSS ACCOUNT FOR YEAR ENDED 31 DECEMBER 2010

Sales		15,150,000
Deduct: Cost of Sales Gross Profit	10,477,500 4,672,500
Wages Departments		1,375,000
Office		645,000
Restaurant	405,000
Bad debt		125,000
Departmental expenses		292,500
Delivery expenses		147,500
Directors fees and Emoluments		497,500
Discounts Allowed		84,000
Establishment Charges (Rent, heating, etc.)		615,000
Interest on Bank Overdraft		52,600
Professional fees		287,500
Sales Promotion		125,000
Sundry Expenses		89,600
Net Loss for the quarter 68,700

APPENDIX 2

Departments	General	Women	Men	Toys	Restaurant
Sales	2,400,000	5,050,000	2,250,000	3,500,000	1,950,000
Purchases	1,700,000	3,250,000	1,245,000	2,900,000	1,525,000
Opening Stock	975,000	315,000	135,000	885,000	127,500
Closing stock	1,015,000	265,000	127,500	1,047,500	125,000
Wages	400,000	275,000	250,000	450,000	405,000
Department expenses	55,000	35,000	10,000	125,000	67,500
Sales promotion	20,000	15,000	15,000	75,000
Floor space	20%	20%	15%	35%	10%

Note:

Restaurant floor space also contains all administrative offices.

REQUIRED

Prepare a report which examines the proposals to

(i) close the toy department and restaurant

(ii) reduce selling prices by 5% in the other departments (25 marks)