Problem one

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two
responsibility centers: the City Division, which contains stores in downtown locations, and the Mall
Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of
the City Division, which has been operating at a loss for the last several years. The most recent City
Division income statement follows. The CEO has asked for your advice on shutting down the City
Division’s operations. If the City Division eliminated, corporate administration not expected to change,
nor any other changes expected in the operations or costs of the Mall Division.

BETTY'S FASHIONS, CITY DIVISION Divisional Income Statement Differential Revenues and
Costs for the Year Ending January 31
Sales revenue $ 4,300,000
Differential Costs advertising City division $ 175,000
Differential Cost of goods sold 2,150,000
Differential Divisional administrative salaries 290,000
Differential Selling costs (sales commissions) 580,000
Differential Rent 735,000
Share of corporate administration 475,000
Total costs $4,405,000
Net loss before income tax benefit $ (105,000)
Tax benefit t at 40% rate 42,000
Net loss $ (63,000)

Requirements:
1. What revenues and costs are probably differential for the decision to discontinue City
Division’s operations?
2. What will be the effect on Betty’s profits if the division eliminated?

Problem 2

Cost Data for Managerial Purposes As an analyst at Delta Airlines, you asked to help the operations
staff. Operations has identified a new method of loading baggage that expected to result in a 30
percent reduction in labor time but no changes in any other costs. The current labor cost to load bags is
$2 per bag. Other costs are $1 per bag.

Requirements:
1. What differential costs should the operations staff consider the decision to use the new method
next year?
2. What would be the cost savings per bag using it?
3. Describe how management would use the information in requirement one and any other
appropriate information to proceed with the contemplated use of the new baggage loading
method.