Import Distributors, Inc. Import Distributors, Inc. (IDI), imported appliances and distributed them to retail stores in the Rocky Mountain States. IDI carried three broad lines of merchandise audio equipment (tuners, tape decks, CD players, etc.), television equipment (including videotape recorders), and kitchen appliances (refrigerators, freezers, and stoves that were more compact then U.S. models). Each line accounted for about one-third of total IDI sales revenues. Although each line was referred to by IDI managers as ?department,? until 1994 the company did not prepare departmental income statements. In late 1993, departmental accounts were set up in anticipation of preparing quarterly income statements by department starting in 1994. In early April of 1994, the first such statements were distributed to the management group. Although in the first quarter of 1994 IDI had earned net income amounting to 4.3% of sales, the television department had shown a gross margin that was much too small to cover the department?s operating expenses. Look at exhibit 1 Television Department Income statement % Net Sales Revenues $1,112,403.00 100 Cost of Sales $1,422,473.00 88.2 Gross margin $189,930.00 11.8 Operating expenses personnel expenses $10,140.00 department managers office $12,393.00 rent $50,107.00 inventory, taxes, and insurance $37,274.00 utilities $3,006.00 delivery costs $32,248.00 sales commission $80,621.00 administrative costs $40,310.00 inventory financing charge $23,708.00 total $289,807.00 18 income taxes -$34,957.00 -2.2 net income -$64,920.00 -4 The television department?s poor showing prompted the company?s accountant to suggest that perhaps the department should be discontinued. ?This is exactly why I proposed that we prepare departmental statements-to see if each department is carrying its fair share of the load?, the accountant explained. This suggestion led to much discussion among the management group, particularly concerning two issues: First, was the first quarter of the year representative enough of longer-term results to consider discontinuing the television department? And second, would discontinuing television equipment cause a drop in sales in the other two departments? One manager, however, stated that ?even if the quarter was typical and other sales wouldn?t be hurt. I?m still not convinced we?d be better off dropping our television line.? What action should be taken with regard to the television department?
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