Question
Import Distributors, Inc. [IDI] Import Distributors, Inc. (IDI), imported appliances and distributed them to retail appliance stores in the Rocky Mountain states. IDI carried three
Import Distributors, Inc.[IDI]
Import Distributors, Inc. (IDI), imported appliances and distributed them to retail appliance stores in the Rocky Mountain states. IDI carried three broad lines of merchandise: audio equipment (tuners, tape decks, CD players, etc.), television equipment (including videotape recorders), and kitchen appliances (refrigerators, freezers, and stoves that were more compact than U.S. models). Each line accounted for about one-third of total IDI sales revenues. Although each line was referred to by IDI managers as a department, until 1994 the company did not prepare departmental income statements.
In late 1993, departmental accounts were set up in anticipation of preparing quarterly income statements by department starting in 1994. In early April of 1994, the first such statements were distributed to the management group. Although in the first quarter of 1994 IDI had earned net income amounting to 4.3 percent of sales, the television department had shown a gross margin that was much too small to cover the departments operating expenses (see Exhibit 1).
The television departments poor showing prompted the companys accountant to suggest that perhaps the department should be discontinued.
This is exactly why I proposed that we prepare departmental statements to see if each department is carrying its fair share of the load, the accountant explained. This suggestion led to much discussion among the management group, particularly concerning two issues: First, was the first quarter of the year representative enough of longer-term results to consider discontinuing the television department? And second, would discontinuing television equipment cause a drop in sales in the other two departments? One manager, however, stated that even if the quarter was typical and other sales wouldnt be hurt, Im still not convinced wed be better off dropping television line.
EXHIBIT 1 | TELEVISION DEPARTMENT | ||||||
Income Statement | |||||||
For the First 3 Months of 1994 | |||||||
Percent | |||||||
Net sales revenues | $1,612,403 | 100.0 | |||||
Costs of sales | 1,422,473 | 88.2 | |||||
Gross margin | 189,930 | 11.8 | |||||
Operating expenses: | |||||||
Personnel expenses (Note 1) | 10,140 | ||||||
Department manager's office | 12,393 | ||||||
Rent (Note 2) | 50,107 | ||||||
Inventory, taxes, and insurance | 37,214 | ||||||
Utilities (Note 3) | 3,006 | ||||||
Delivery costs (Note 4) | 32,248 | ||||||
Sales commissions (Note 5) | 80,621 | ||||||
Administrative costs (Note 6) | 40,310 | ||||||
Inventory financing charge (Note 7) | 23,708 | ||||||
Total operating expenses | 289,307 | 18.0 | |||||
Income taxes (credit) | (34,957) | (2.2) | |||||
Net income (loss) | (64,920) | (4.0) | |||||
1) These were warehouse personnel. Although merchandise in the warehouse was arranged by department, these personnel performed tasks for all three departments on any given day. | |||||||
2) Allcoated to departments on the basis of square footage utilized. IDI hada 5-year noncancelable lease for the facilities | |||||||
3) Allocated to departments on the basis of square footage utilized. | |||||||
4) Allocated on the basis of sales dollars. A delivery from IDI to a retail store typically included merchandise from all three departments | |||||||
5) Salespersons were paid on a straight commission basis; each one sold all three lines | |||||||
6) Allcoated on the basis of sales dollars. | |||||||
7) An accounting entry that was not limited solely to the cost of financing inventory, assessed om average inventory in order to motivate department managers not to carry excessive stocks. This charge tend to be about 3 times the company's actual out-of-pocket interest costs. Question What action should be taken with regard to the television department?
I would appreciate if you can give me a detailed answer regarding how we are solving the question and what format are we using to solve it. And get a little summary of how to solve this question. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started