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Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows.
Clothing
Shoes
Accessories
Sales
$850,000
$320,000
$150,000
Varable Costs
$510,000
$270,000
$82,500
Fixed Costs
$290,000
$70,000
$42,000
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. Sophisticates' 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. Determine whether the shoe department should be closed by computing how much income will increase or decrease if the department is eliminated.
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