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    Cathy's Classic Clothes

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    Cathy's 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 non-financial 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 district's 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 net income in excess of budgeted net income. The company's net 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 $1,500,000 and its cost of goods sold amounted to $633,750
    -The Coastal District spent $75,000 on advertising
    -General and administrative expenses for the Coastal district amounted to $180,000
    -At the New Haven store, sales were 40 percent of Coastal District sales, while sales at the Boston store were 35 percent of district sales. The COG sold in both New Haven and Boston was 42 percent of sales.
    -Variable selling expenses were 6 percent of sales for all stores, districts, and regions
    -Variable administrative expenses were 2.5 percent of sales for ALL
    -Maintenance cost:New haven$7,500;Boston$600;and Portland$4,500
    Advertising:New Haven store spent two-thirds of the Coastal District total outlay for advertising, which was 10 times the amount Boston spent
    -Coastal District renal expense amounted to $150,000
    -Rental for New Haven store wer 40 percent of the Coastal districts total, Boston incurred 30 percent of the district total
    -District expenses were allocated to the stores based on sales
    -New England region general and administrative expenses of $165,000 were allocated to the Coastal District.These expenses were, in turn, allocated equally to the districts 3 stores

    1.Prepare the May segmented income statement for the coastal district and for the New Haven and Boston stores.
    2.Compute the Portland store's net income for May.
    3.How did responsibility accounting impact bonus structure on the managers behavior and the effect of their behavior on financial results for the New Haven store and the Boston store.
    4.If the assistant controller for the New England region helped the New Haven store manager bury his excessive advertising cost in miscellaneous expenses such as rent and other costs. As given specific ethical standards how has assistant controller tarnished his work ethic.

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    Solution Summary

    This solution shows step-by-step calculations to prepare the May segmented income and determine the net income for May. It also discusses the impact of bonus structure on managers and ethical work standards.