Management is considering closing the shoe operation

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Reference no: EM13572685

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.

Reference no: EM13572685

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