Cathy's Classic Clothes is a retail organization that sells to professional women in the Northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a management by objective (MBO) system and a responsibility accounting system that focuses on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish goals which are not solely financial, and these goals are integrated into the budget. Actual performance is measured each month.

The Northeast Region consists of Districts A and B. District A consists of three stores, 1, 2, and 3 with District B consisting of three stores, 4, 5, and 6. District A's performance has not been up to expectations in the past. For the month of May, the district manager has set performance goals with the managers 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. Since the district manager is unsure what type of bonus will encourage better performance, the manager of Store 1 will receive a bonus based on sales in excess of budgeted sales of $570,000 while 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 the month of May 2013 are given below.

• At Store 1, sales are 40 percent of District A sales while sales at Store 2 are 35 percent of District A sales. The cost of goods sold at both Stores 1 and 2 is 42 percent of sales.
• Variable selling expenses (sales commissions) are 6 percent of sales for all stores, districts, and regions.
• Variable administrative expenses are 2.5 percent of sales for all stores, districts, and regions.
• Maintenance cost includes janitorial and repair services and is a direct cost for each store. The store manager has complete control over this outlay; however, this cost should not be below one 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 while Store 2 incurs 30 percent of District A's total.
• District expenses are allocated to the stores based on sales.
• Other relevant information:
• District AStore 1Store 2Sales$ 1,500,000Cost of goods sold633,750Store Maintenance12,6007,500600Advertising75,000Rent and other costs150,000District expense180,000Regional expenses165,00055,00055,000
• Discuss the impact of the responsibility accounting system and bonus structure on the manager's behavior and the effect of this behavior on the financial results for Store 1 and Store 2.