In 20X0 Haley’s Department Store devoted 6,000 square feet to the display and sale of clothing, 1,500 square feet to linens and bedding, and 2,000 square feet to jewelry and cosmetics. The store is 10,000 square feet, and 500 square feet were unused. The cost to maintain the store was $95,000, which was allocated among the three departments based on 9,500 square feet of occupied space. In 20X1 management put a confectionery shop in the previously unused space. However, the allocation was not updated for this change. In 20X1 the four departments’ contribution margins before the allocation of building costs were:
Clothing ..... $72,000
Bedding ..... 19,500
Jewelry ...... 40,000
Confections ... 4,000
During 20X2 the four department managers each requested that they be allowed to expand their floor space. They argued that the floor space of one of the other departments should be reduced so that their own department could be expanded.

A. Determine earnings after the building costs have been allocated for 20X1 for each department (remember that the firm allocated costs to only three departments).
B. Suppose the managers mistakenly used the earnings after building costs were allocated to determine the contribution per unit of constrained resource (per square foot) for each department. Also assume the confections department was allocated store maintenance costs based on its use of 500 square feet. Which department would be allowed to expand, and which one should be reduced or dropped?
C. Suppose that managers properly calculated the contribution margin per unit of constrained resource (per square foot) for part (B) by ignoring allocated costs. Which department would be allowed to expand, and which one would be reduced?
D. Explain why the method in part (C) is better for making this decision. What are the qualitative factors related to this decision?

  • CreatedJanuary 26, 2015
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