Elite Classic Clothes is a retailer 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 responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each month. The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal Districts 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 the New Haven and Boston stores, who will receive bonuses if certain performance measures are exceeded. The manager in Portland decided not to participate in the bonus scheme. Since the district manager is unsure what type of bonus will encourage better performance, the New Haven manager will receive a bonus based on sales in excess of budgeted sales of $570,000, while the Boston manager will receive a bonus based on operating income in excess of budget. The companys operating income goal for each store is 12 percent of sales. The budgeted sales revenue for the Boston store is $530,000. Other pertinent data for May are as follows: Coastal District sales revenue was $1,560,000, and its cost of goods sold amounted to $635,850. The Coastal District spent $75,000 on advertising. General and administrative expenses for the Coastal District amounted to $185,000. At the New Haven store, sales were 35 percent of Coastal District sales, while sales at the Boston store were 30 percent of district sales. The cost of goods sold in both New Haven and Boston was 40 percent of sales. Variable selling expenses (sales commissions) were 6 percent of sales for all stores, districts, and regions. Variable administrative expenses were 2.50 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. Maintenance costs were incurred as follows: New Haven, $7,200; Boston, $800; and Portland, $4,100. Advertising is considered a direct cost for each store and is completely under the control of the store manager. The New Haven store spent two-thirds of the Coastal District total outlay for advertising, which was 8 times the amount spent in Boston on advertising. Coastal District rental expense amounted to $180,000. The rental expenses at the New Haven store were 30 percent of the Coastal Districts total, while the Boston store incurred 20 percent of the district total. District expenses were allocated to the stores based on sales. New England Region general and administrative expenses of $156,000 were allocated to the Coastal District. These expenses were, in turn, allocated equally to the districts three stores.

What are the key factors (both financial and strategic) that Elites Classic Clothes should consider in its evaluation of the proposed bonus plans for Boston and New Haven? Why are these factors important?

What is the expected impact, under the proposed bonus structures (including the opt-out of the Portland manager), on your managers behavior?

What is the expected impact, under the proposed bonus structures (including the opt-out of the Portland manager), on the financial results for the 3 individual stores, and for the Coastal District as a whole?

From a strategic perspective, what are the advantages and disadvantages to implementing multiple different bonus plans (as opposed to one, unified plan)?

What are some next steps that you, as the Coastal District Manager, will take, after implementing these plans for the Month of May?

SIC CLOTHES: NEW ENGLAND REGION Segmented Income Statement For May Coastal Distric New Haven Boston tore tore Sales Cost of goods sold Gross margin Operating expenses $ 1,560.000 $ 546.000'/ $ 468.000 187.200 $ 924,150 $ 327,600 $ 280,800 635.850 218.400 93.600'/ $ 39,000 32,760'/ $ 13,650 28.080 11,700 $ Variable selling Variable administrative Other direct expenses Store maintenance Advertising Rent and other costs 12.100 75,000 180,000 7,200 50,000 54,000 800 6250 36.0 Indirect expenses District general administrative expenses Regional general and administrative expenses 55,500 52.000 185,000 64760 52.000 156.000 Total expenses Operating income 740,700 $274,360 $190,330 183.450 $ $ 53,240 S 90,470