Reference no: EM132465949
Walton Boot Co. sells men's, women's, and children's boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men's department has a sales staff of nine employees, the manager of the women's department has six employees, and the manager of the children's department has three employees. All departments are housed in a single store.
In recent years, the children's department has operated at a net loss and is expected to continue to do so. Last year's income statements follow:
|
|
Men's
Department
|
Women's
Department
|
Children's
Department
|
|
Sales
|
$ 720,000
|
$ 500,000
|
$ 220,000
|
|
Cost of goods sold
|
(274,500)
|
(183,600)
|
(105,875)
|
|
Gross margin
|
445,500
|
316,400
|
114,125
|
|
Department manager's salary
|
(70,000)
|
(59,000)
|
(39,000)
|
|
Sales commissions
|
(124,200)
|
(93,600)
|
(36,900)
|
|
Rent on store lease
|
(39,000)
|
(39,000)
|
(39,000)
|
|
Store utilities
|
(22,000)
|
(22,000)
|
(22,000)
|
|
Net income (loss)
|
$ 190,300
|
$ 102,800
|
$ (22,775)
|
Question 1: Calculate the contribution margin. Determine whether to eliminate the children's department.
Question 2: Calculate the net income for the company as a whole with the children's department.
Question 3: Confirm the conclusion you reached in Requirement a by preparing income statements for the company without the children's department.
Question 4: Eliminating the children's department would increase space available to display men's and women's boots. Suppose management estimates that a wider selection of adult boots would increase the store's net earnings by $50,000. Would this information affect the decision that you made in Requirement a?