Question

P 6–14: New York Fashions

New York Fashions owns 87 women’s clothing stores in shopping malls. Corporate headquarters of New York Fashions uses flexible budgets to control the operations of each of the stores. The following table presents the August flexible budget for the New York Fashions store located in the Crystal Lakes Mall:

NEW YORK FASHIONS—CRYSTAL LAKES MALL STORE

Flexible Budget
August

Expense	Fixed	Variable
Cost of goods sold		45%
Management	$ 7,000	1
Salespersons	2,000	8
Rent	12,000	5
Utilities	900
Other	1,500

Variable costs are based on a percentage of revenues.

Required:

1. Revenues for August were $80,000. Calculate budgeted profits for August.

2. Actual results for August are summarized in the following table:

NEW YORK FASHIONS—CRYSTAL LAKES MALL STORE

Actual Results from Operations
August

Revenues	$ 80,000
Cost of goods sold	38,000
Management	7,600
Salespersons	9,800
Rent	16,000
Utilities	875
Other	1,400

Prepare a report for the New York Fashions—Crystal Lakes Mall store for the month of August comparing actual results to the budget.

3. Analyze the performance of the Crystal Lakes Mall store in August.

4. How does a flexible budget change the incentives of managers held responsible for meeting the flexible budget as compared to the incentives created by meeting a static (fixed) budget?

Answer 1

COMPARISON OF FLEXIBLE BUDGET WITH THE ACTUAL AND STATIC BUDGET:
	Actual	Rev. & Spending Vari.	F/U/N	Flexible budget	Activity Vari.	F/U/N	Statice Budget
Revenues	80000	0	N	80000	0	N	80000
Cost of Goods Sold	38000	2000	U	36000	0	N	36000
Gross Profit	42000	-2000	U	44000	0	N	44000
Less:Expenses:
management	7600	-200	F	7800	0	N	7800
sales persons	9800	1400	U	8400	0	N	8400
rent	16000	0	N	16000	0	N	16000
utilities	875	-25	F	900	0	N	900
other	1400	-100	F	1500	0	N	1500
Total Expenses	35675	1075	U	34600	0	N	34600
NOI	6325	-3075	U	9400	0	N	9400