Reference no: EM132638704

Clothing sells clothing, shoes, and accessories at a location in Denton, TX. Information for the just concluded calendar year follows.

                                        Clothing                  Shoes               Accessories

Sales                         $850,000                 $320,000        $150,000
Less: Variable costs      $510,000                 $270,000         $82,500
Fixed costs                  290,000                     70,000             42,000
Total costs                 $800,000                    $340,000          $124,500
Operating income (loss)  $50,000                  $(20,000)              $25,500

Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Clothing will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.

Required:

Question 1: Your supervisor has asked you to determine whether the shoe department should be closed and the effect upon income if closed.