Solution-Determine whether the shoe department should be

Determine whether the shoe department should be closed

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Reference no: EM13536372

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.

Reference no: EM13536372

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Determine whether the shoe department should be closed

Reference no: EM13536372

Reference no: EM13536372

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