Elegant Department Store is a large local retail store which has three departments. The income statement in Year X reporting the performance of the three departments was extracted as follows: Department A B Total $ S S $ Sales 820,000 750,000 1,430,000 3,000,000 Costs 628,200 760.500 1.222.800 2.611.500 Profit/(Loss) 191,800 (10,500) 207,200 388,500 III. The company's management is concerned at the performance of department B. The following alternatives are being considered: 1. To close department B and to turn the space into an additional storage area for the goods sold in department C. It is forecast that greater access to stock for immediate delivery would increase the sales of department C by 10%. The sales staff of department B would be made redundant- II. To refurbish department B at a cost of $24,000. The department would be closed for 2 months while refurbishment took place but the sales would be retained. Sales in a full year are expected to be 15% higher from the refurbished department - To close department B, and to allocate its space, 50% to department A and 50% to department C, so increasing sales in those departments by 15% and 20% respectively. Higher purchase quantities leading to lower prices from suppliers would increase the gross margin in each department by 1%. With this alternative, 65% of the sales staff in department B (by cost) would be made redundant. The remainder would be transferred 50% to department A and 50% to department C.- Other information: (1) Gross profit margins in Year X were 60%, 40%, and 45% for departments A, B, and C respectively. (ii) General fixed costs for Year X amounting to $630,000 have been apportioned to departments on a basis of sales in the income statemente (111) The costs for the sales staff in departments A, B, and C are $128.000, $153.000 and $136,000 respectively. (iv) Sales are made evenly over the year. Required: Evaluate each of the alternatives proposed by the management of Elegant Department Store and make recommendations to the management for decision. (20 marks) Elegant Department Store is a large local retail store which has three departments. The income statement in Year X reporting the performance of the three departments was extracted as follows: Department A B Total $ S S $ Sales 820,000 750,000 1,430,000 3,000,000 Costs 628,200 760.500 1.222.800 2.611.500 Profit/(Loss) 191,800 (10,500) 207,200 388,500 III. The company's management is concerned at the performance of department B. The following alternatives are being considered: 1. To close department B and to turn the space into an additional storage area for the goods sold in department C. It is forecast that greater access to stock for immediate delivery would increase the sales of department C by 10%. The sales staff of department B would be made redundant- II. To refurbish department B at a cost of $24,000. The department would be closed for 2 months while refurbishment took place but the sales would be retained. Sales in a full year are expected to be 15% higher from the refurbished department - To close department B, and to allocate its space, 50% to department A and 50% to department C, so increasing sales in those departments by 15% and 20% respectively. Higher purchase quantities leading to lower prices from suppliers would increase the gross margin in each department by 1%. With this alternative, 65% of the sales staff in department B (by cost) would be made redundant. The remainder would be transferred 50% to department A and 50% to department C.- Other information: (1) Gross profit margins in Year X were 60%, 40%, and 45% for departments A, B, and C respectively. (ii) General fixed costs for Year X amounting to $630,000 have been apportioned to departments on a basis of sales in the income statemente (111) The costs for the sales staff in departments A, B, and C are $128.000, $153.000 and $136,000 respectively. (iv) Sales are made evenly over the year. Required: Evaluate each of the alternatives proposed by the management of Elegant Department Store and make recommendations to the management for decision. (20 marks)
