01 March 2021 13:33

1. The pupil’s Book Co has two books selling outlets; Kalidas Book House and Tulsidas Book House. Each store
has a manager who has a great deal of decision authority over the individual store. A central office however,
handles advertising, marketing research, acquisition of books, legal services and other staff functions. The
pupil’s Book Co current accounting system allocates all costs to the stores.
Item Total Company Kalidas Book House Tulsidas Book House
Sales Revenue 700000 350000 350000
Cost of merchandise sold 450000 225000 225000
Gross margin 250000 125000 125000
Operating expenses-
Salaries and wages 63000 30000 33000
Supplies 45000 22500 22500
Rent & utilities 60000 40000 20000
Depreciation 15000 7000 8000
Allocated staff cost 60000 30000 30000
Total operating expenses 243000 129500 113500
Operating Income(Loss) 7000 (4500) 11500

Each book store manager makes decision 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 size of the store.
Supplies are variable cost. Variable salaries and wages are equal to 8% of the cost of merchandise sold,
the reminder of salaries and wages is a fixed cost. Rent, utilities and depreciation are also fixed costs.
Allocated staff cost are unaffected by any events at the bookstore, but they are allocated as a proportion of
sales revenue.
Required-
(i) Using the contribution approach, prepare a performance report that distinguishes the performance of each
bookstore from that of the bookstore manager.
(ii) Evaluate the performance of each bookstore.
(iii) Evaluate the performance of each manager.

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 The home appliances division of Crompton Greaves Ltd now shows a profit rate of 15% on sales of Rs 36 million. An
investment of Rs 12 million is needed to finance these sales. The management of the firm is considering the following
two alternative plans for improving operations submitted by two employees- Mr Anil and Mr Gautam.
 Mr Anil believes that the sales volume can be doubled by greater promotional efforts. It would lower the profit rate to
14% of sales and requires an additional investment of Rs 3 million.
 Mr Gautam favors eliminating some unprofitable appliances and improving efficiency by adding Rs 6 million in capital
equipment. This alternative would decrease sales volume by 10% but improve the profit rate to 17% of sales.
You are required to determine-
i. The company’s current rate of return on investment in the division
ii. The anticipated rate of return under the alternatives suggested by Mr Anil and Mr Gautam and which plan you think
should be recommended.

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