The Book & Game Company has two bookstores: Auntie’s and Merlin’s. Each store has managers who have a great deal of decision authority over their store. Advertising, market research, acquisition of books, legal services and other staff functions, however, are handled by a central office. The Book & Game Company’s current accounting system allocates all costs to the stores. Results for 20X1 were as follows:

Each bookstore manager makes decisions that affect salaries and wages, supplies and depreciation. In contrast, rent and utilities are beyond the managers’ control because the managers did not choose the location or the size of the store.

Supplies are variable costs. Variable salaries and wages are equal to 8 per cent of the cost of merchandise sold; the remainder of salaries and wages is a fixed cost. Rent, utilities and depreciation also are fixed costs. Staff costs represent the cost of activities performed by the central office. Events at the individual bookstores do not affect staff costs; nevertheless, Book &

Game Company allocates them as a proportion of sales revenue.

1. Using the contribution approach, prepare a performance report that distinguishes the performance of each bookstore from that of the bookstore manager.

2. Evaluate the financial performance of each bookstore.

3. Evaluate the financial performance of each manager.

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Item Sales revenue Cost of merchandise sold Gross margin Salaries and wages Supplies Rent and utilities Depreciation Allocated staff costs Total operating expenses Operating income (loss) Total company €700,000 450,000 250,000 63,000 45,000 60,000 15,000 60,000 243,000 € 7,000 Auntle's €350,000 225,000 125,000 30,000 22,500 40,000 7,000 30,000 129,500 € (4,500) Merlin's €350,000 225,000 125,000 33,000 22,500 20,000 8,000 30,000 113,500 € 11,500