Claires Classic Couture is a retail organization that sells to professional women in the Midwest. 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 Midwest 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 As 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 plan. 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 companys 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, 2017 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 is 42 percent of sales.

o District A sales are $1,500,000.

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.

o Store 1 expenses are $7,500.

o Store 2 expenses are 600

o District A expenses are $12,600

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 As total outlay for advertising which was ten times more than Store 2 spent on advertising.

o District As outlay for advertising is $75,000.

The rental expenses at Store 1 are 40 percent of District As total while Store 2 incurs 30 percent of District As total.

o District As rental expenses are 150,000.

District expenses are allocated to the stores based on sales.

o District As expenses are $180,000.

Regional expenses are allocated to each store in the district equally.

o Regional expenses are $165,000.

REQUIRED: Using the five steps of strategic decision-making:

1. Complete the May 2017 performance report (income statement) for District A and Stores 1 and 2.

2. Discuss the impact of the responsibility accounting system and bonus structure on the managers behavior and the effect of this behavior on the financial results for Store 1 and Store 2.

Some hints on this case:

Look at Store 1s advertising expenditures. Comment on the effectiveness of the advertising

Consider how the bonus of Store 2s bonus will be computed. Will Store 2s management be happy or unhappy with the compensation plan.

o Articulate your rationale. If unhappy, offer a suggestion for improvement.