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, radios, etc.), television equipment (including DVD and BluRay recorders), kitchen appliances (refrigerators, freezers, and stoves that were more compact than standard 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 now the company had not prepared departmental income statements.

Late last year, departmental accounts were set up in anticipation of preparing quarterly income statements by department starting in the current year. In early April of this year, the first such statements were distributed to the management group. Although in the first quarter 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. The television departments poor showing prompted the companys accountant to suggest that perhaps the department should be discontinued. The accountant explained:

This is exactly why I proposed that we prepare departmental statements--to see if each department is carrying its fair share of the load.

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,

Even if the quarter was typical and the other sales wouldnt be hurt, Im still not convinced wed be better off dropping our television line.

What action should be taken regarding the television department?

(a) 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.

(b) Allocated to departments on the basis of square footage utilized. IDI had a 5-year noncancelable lease.

(c) Allocated to departments on the basis of square footage utilized.

(d) Allocated on the basis of sales dollars. A delivery from IDI to a retail store typically included merchandise from all three departments.

(e) Salespersons were paid on a straight commission basis; each one sold all three lines.

(f) Allocated on the basis of sales dollars.

(g) An accounting entry that was not directly related to the cost of financing inventory; assessed on average inventory, in order to motivate department managers not to carry excessive stocks. This charge tended to be about three times the company's actual out-of-pocket interest costs.

IMPORT DISTRIBUTORS Exhibit 1. Television Department Income Statement For the first 3 Months of This Year