Cathy's Classic Clothes is a retaller that sells to protersional women in the northeart. The Arm leaces space for stores in upseale shopping centers, and the orpanizational structure contirts of repons, ditticts, and stores. Each regon consirts of two or more districts, each district consists of three or more ttores. Each sore, firtrict, and rejion has been established as a probt center. At all levels, the company uses a responsibility accounting syitem focusing on information and knonfedge mather than blame and control. Each year, managers, in consulation with their supernisors, eitablith fnanciat and nonanancial zoals. and these zoals are integrated into the bodget. Actual performance is mearured each month. The New England Region consists of the Coastal Dirtrict and the lolesd Dirtrict. The Coartal District iacludes the New Haven. Boston, and Portiand stores. The Coastal Disthict's performance has tot been up to expectations in the part. For the month of May, the district manager has set performance goals with the managers of the Niew Hawea and Boston stores. "ho will receive boauses if certain performance measures are eveeeded. The manager in Porthand decided not to participate in the bonus seheme. Since the district manayer is tinsure what type of bonus will ebcourage better penformance, the New Haken manager will receive a bonus based on sales in excess of budpeted sales of $570,000. while the Boston magaper mitl ttcetie a bonus based on operating income in excess of buicset The company's operating income goal for each stote is 12 perceot of sales. The bodgeted salec revenue for the Boston store is $530,000. Other pertinent data for May are as follows - Coastal District rales revenue was $1,500,000, and atr cort of poodr sold amounted to $633,750. - The Coartal District speat $75,000 on advertiring: - General and administrative expenses for the Coastal Distnat amounted to $160,000 - At the New Haven store. sales were 40 percent of Coastal Ditrict aales, while sales at the Borton store were 35 percent of district sales. The cort of goods sold in both New Haven and Boston war 42 percent of raler - Variabie selling expenses (sales commirsns) were 6 percedr of sibes for all stoces, dintricts, and regions - Variable administrative expenses were 2.5 petceat of sales for all rtorer, dirtncts, and repont: - Maintenance cost includes janitorial and repair services and is a direct cort for each store. The stoce manager has complete control over this outlay, Maistenance costs nere incurred ar folowns Nes Haven, 57,500, Boston, 5600, and Portland, 54,500 . - Advertising is considered a direct cost for each store and is ecenglecely ander the control of the atore manager The New Havea store spent twothirds of the Coastal District total outlay for advertiting which wit 10 times the amonat spent in Boston on advertining - Coastal District rental expense amounted to $150,000 - The rental expenses at the New Haven mtore wefe 40 peroent of the Cotwat Dirtict's total while the Boston stoce incurred 30 percent of the district tota! - Dirtrict expenses were allocated to the stoces baced on sales. - New Engiand Region zeneral and admini-trative expensts of 5155,000 mere allocated to the Coastal District. These expenses were. in turn, allocated equilly to the Cirtrict's three steres Required: 1. Prepare the May segmented iacome statemeat for the Coastal Dirtrict and foe tbe New Harten and Boston stores 2. Compute the Portland store's operating incotne for Mry 3. Discuss the impact of the responsibility-accointing system and bonar ztrocture on the managers" behavior and the effect of their behavior on the fnancial results for the New Haven store and the Boston ttore 4. The asristant controlier for the New England Repion, Jack 1iner, has beeh a close fhiend of the New Haven rtare manager for over 20 years. When Iiver saw the seymented income statement (as prepared in requremeat 1) be realized that the New Havea store manager had really gone ovetboard on advertining expenditarts. To make his thend look better to the rezional management, be reclassifted $25,000 of the atvertiting expesditures as miccellateous expenver, and buried them in rent and other: costs Comment on the ethical issoes in the astitant coatroller's actions (Refter to Fecile ethicad standards that were given in th C bapter 1.)