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Journey's End, Inc.
Author(s):
Merchant, Kenneth A.
Functional Area(s):
   Management Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 2
Teaching Note: Available. 
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First Page and the Assignment Questions:
In February 2005, managers at Journey's End, Inc. were debating the relative profitability of the company's three distribution channels: catalog sales, corporate sales, and retail sales. Some managers thought that catalog sales were the company's most profitable channel and that investments should be made to grow this channel. Others were not so sure. To address this issue, the managers asked Marie Ablondi, a financial analyst on the corporate staff, to conduct a channel profitability analysis. They decided to await the results of Marie's analysis before they continued their discussion of the company's distribution strategy.

Journey's End sold active clothing wear. The company contracted out the manufacturing of all products to outside suppliers, located mostly in Asia and in the Dominican Republic. Journey's End employees maintained a large catalog mailing list. Catalog buyers, mostly individuals, placed generally small quantity orders by phone or over the Internet. All of the corporate sales orders, which were generally large quantity special orders of logo apparel, were brought in through Journey's End's field sales force. About three-quarters of the corporate orders required the sales people, and usually some design experts and managers, to engage in time-consuming order specification and/or price negotiation work. The field sales force also brought in most of the retail orders. The sales people called regularly on the retail outlets' buyers. The buyers generally purchased medium quantities of goods at wholesale prices. Some of the retailers required special product labeling and packaging.

Journey's End managers had been monitoring the performances of their businesses and distribution channels at the gross margin level. At this level, all three distribution channels looked profitable, as is shown in Table 1.

A few managers, though, suspected that the gross margin-level measures might be presenting misleading performance indications. These managers noted that the company's selling, general and administrative (SG&A) expenses were “below” the gross margin line. Their intuition was that if the SG&A costs were allocated to distribution channels, a quite different performance picture might result. Their concern led to Marie being assigned to do a study.

Marie's first task was to identify the relevant SG&A expenses. She found that the direct sales force was paid a 10% commission on the sales revenue that they brought in. In addition to the commissions, the material amounts of Journey's End's corporate selling, general and administrative expenses (SG&A) for the fiscal year 2004 were as shown in Table 2.