Department Allocations, Decision Making

In 2016, Haley's Department Store devoted 600 square metres to the display and sale of clothing, 150 square metres to linens and bedding, and 200 square metres to jewellery and cosmetics. The store is 1,000 square metres, and 50 square metres were unused. The cost to maintain the store was $95,000, which was allocated among the three departments based on 950 square metres of occupied space. In 2017, management put a confectionery shop in the previously unused space. However, the allocation was not updated for this change. In 2017, the four departments' contribution margins before the allocation of building costs were

Clothing	$72,000
Bedding	19,500
Jewellery	40,000
Confections	4,000

During 2018, the four department managers all requested that they be allowed to expand their floor space. Each argued that the floor space of one of the other departments should be reduced so that their own department could be expanded.

REQUIRED

A.

Determine earnings after the building costs have been allocated for 2017 for each department (remember that the firm allocated costs to only three departments).

B.

Suppose the managers mistakenly used the earnings after building costs were allocated to determine the contribution per unit of constrained resource (per square metre) for each department. Also assume the confections department was allocated store maintenance costs based on its use of 50 square metres. Which department would be allowed to expand, and which one should be reduced or dropped?

C.

Suppose that managers properly calculated the contribution margin per unit of constrained resource (per square metre) for Part B by ignoring allocated costs. Which department would be allowed to expand, and which one would be reduced?

D.

Explain why the method in Part C is better for making this decision. What are the qualitative factors related to this decision?