Biden Department Store has four departments: men's, women's, children's, and electronics. The following information is provided:
The company's accountant needs to allocate the store's annual rent of $160,000.Required:1) Compute the allocation rate that should be used to allocate the rent cost to the four departments.2) Compute the amount of rent that should be allocated to each of the four departments.3) Currently, the managers are paid a bonus based on sales. As you can see from the above table, the women's department manager will receive the largest bonus. Do you believe this bonus plan is fair to all four department managers? Why or why not?
What will be an ideal response?
1) Allocation rate: $160,000 ÷ 40,000 square feet = $4.00 per square foot
2) Rent per department:
Men's: 10,000 sq. ft. × $4.00 = $40,000
Women's: 20,000 sq. ft. × $4.00 = $80,000
Children's: 8,000 sq. ft. × $4.00 = $32,000
Electronics: 2,000 sq. ft. × $4.000 = $8,000
3) The current bonus plan appears to favor the large departments that have plenty of room to display a wide variety of merchandise. For example, the electronics department manager might complain that he or she could generate more sales if the department had more room to display more merchandise. A better bonus plan might be one that bases bonuses on each department's contribution to the store's overall profitability.
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