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Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. 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. Sophistication Corner 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:
Determine whether the shoe department should be closed.
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