P$12\mathrm{.}35$ Business unit profit statement; responsibility accounting: retailer

LO $12\mathrm{.}6$ Lakes Cakes makes and sells cakes through three retall stores in South Australla $($Oaklands Park,

$12\mathrm{.}7$ Westlakes and the Adelaide central business district $($CBD$)).$ Lakes Cakes' corporate head office is

located in Westlakes, in office space separate from its Westlakes store.

A review of Lakes Cakes' profit statement indicates a record year in terms of overall sales and

profit. However, Lakes Cakes' head office wants further information on individual store performance.

Management has asked David Kumar, a newly hired accounting graduate, to prepare a profit statement

that highlights profitability of each retail outlet. Kumar initially extracted the following information from

Lakes Cakes' accounting records.

Sales volume, sales price and purchase price data:

The following expenses were incurred for sales commissions, local advertising, property taxes,

management salaries and other non$-$controllable $($but traceable$)$ costs:

Local advertising decisions are made at the store manager level. The assistant manager's salary at

the Adelaide CBD store is determined by the store manager. In contrast, store managers' salaries

are set by Lakes Cakes' head office.

Non$-$traceable fixed corporate expenses total $$865350.$

The company uses a responsibility accounting system.

Required

Assume the role of David Kumar and prepare a profit statement for Lakes Cakes that shows the

profitability of each retail store.

Determine the weakest performing store and discuss probable causes of the weakest store's

performance.

Assume that an opening has arisen at head office, and the company's CEO wants to promote one

of the three existing store managers to the vacant position. Which of the following profit measures

should the CEO use to evaluate each store manager's performance: contribution margin, profit

margin controllable by the store manager, or a store's profit margin? Justify your answer.