You have just finished preparing the management accounting report below for your division. You are very pleased with the performance of your division and show the report to your division president, Karen. Karen does not understand what some of the costs are and why they are in the report. Respond to her questions listed below.
1. What does the $38,400 shrinkage signify?
2. What does it mean to have a $127,040 market loss?
3. Just because we didn’t take advantage of a discount on a purchase, why is this a cost when there was no outflow of dollars directly related to the discount?
Expected revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,200,000
Shrinkage loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,400)
Market loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(127,040)
Actual revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,034,560
Expected purchase costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (400,000)
Lost discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(38,000)
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 596,560
Overhead costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..(66,000)
Order costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,000)
Net operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 529,560