Lanier Company manufactures expensive watch cases sold as souvenirs. Three of it

Question

Lanier Company manufactures expensive watch cases sold as souvenirs. Three of its sales departments are Retail Sales, Wholesale Sales, and Outlet Sales. The Retail Sales Department is a profit center. The Wholesale Sales Department is a cost center. Its managers merely take orders from customers who purchase through the company’s wholesale catalog. The Outlet Sales Department is an investment center because each manager is given full responsibility for an outlet store location. The manager can hire and discharge employees, purchase, maintain, and sell equipment, and in general is fairly independent of company control.

Mary Gammel is a manager in the Retail Sales Department. Stephen Flott manages the Wholesale Sales Department. Jose Gomez manages the Golden Gate Club outlet store in San Francisco. The following are the budget responsibility reports for each of the three departments.

Compare the budgeted measures with the actual results. Decide which results should be called to the attention of each manager.

Budget Retail Sales Wholesale Sales Outlet Sales Sales $   750,000 $   400,000 $   200,000 Variable costs Cost of goods sold 150,000 100,000 25,000 Advertising 100,000 30,000 5,000 Sales salaries 75,000 15,000 3,000 Printing 10,000 20,000 5,000 Travel 20,000 30,000 2,000 Fixed costs Rent 50,000 30,000 10,000 Insurance 5,000 2,000 1,000 Depreciation 75,000 100,000 40,000 Investment in assets 1,000,000 1,200,000 800,000

Explanation / Answer

Mary Gammel manager of retail sales

Profit center

Responsible for improving profitability.

Stephen Flott manager of Wholesale Sales Department

Cost center

Responsible for minimizing cost of the items and operational costs.

Jose Gomez manager of outlet store

Investment center

Responsible for generate positive results with minimum investment.

Budgeted

Actual

Retail

Wholesale

Outlet

Retail

Wholesale

Outlet

Sales

$750000

$400000

$200000

$750000

$400000

$200000

Variable costs;

Cost of goods sold

$150000

$100000

$25000

$192000

$122000

$26500

Advertising

$100000

$30000

$5000

$100000

$30000

$5000

Salaries

$75000

$15000

$3000

$75000

$15000

$3000

Printing

$10000

$20000

$5000

$10000

$20000

$5000

Travel

$20000

$30000

$2000

$14000

$21000

$1500

Total variable costs

$355000

$195000

$40000

$391000

$208000

$41000

Fixed costs;

Rent

$50000

$30000

$10000

$40000

$50000

$12300

Insurance

$5000

$2000

$1000

$5000

$2000

$1000

Depreciation

$75000

$100000

$40000

$80000

$90000

$56000

Total fixed costs

$130000

$132000

$51000

$125000

$142000

$69300

Profit

$265000

$73000

$109000

$234000

$50000

$89700

Percentage (%)

35.33%

81.75%

31.2%

87.5%

1. As we know that retail is the profit center and actual profit is reduced from budgeted hence focuss must be given here to manage costs so that profitability can be maintained as per budgeted standards.

2. Wholesale is cost center and as per actual data it is clear that actual costs have been increased thus manager should focuss to minimizing the costs.

3. Actual and budgeted investment is same. So there is no deviation.

Mary Gammel manager of retail sales

Profit center

Responsible for improving profitability.

Stephen Flott manager of Wholesale Sales Department

Cost center

Responsible for minimizing cost of the items and operational costs.

Jose Gomez manager of outlet store

Investment center

Responsible for generate positive results with minimum investment.

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