Question

Problem 13-26 Eliminating a segment LO 13-4 Fanning 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. Sales Cost of goods sold Cross margin Department manager's salary Sales issions Rent on store lease Store utilities Net Income (loss) Men's Department $ 650,000 (268,000) 382,000 (57,000) (111,200) (26,000) (9.000) $ 178,800 Women's Department $470.000 (178,400) 291,600 (46,000) (80,600) (26,000) 0.000) $ 130,000 Children's Department $180.000 (99,375) 80.625 (26,000) (30,400) (26,000) 19,000) (10,775) Required a. Calculate the contribution margin. Determine whether to eliminate the children's department. b-1. Calculate the net income for the company as a whole with the children's department. b-2. Confirm the conclusion you reached in Requirementa by preparing income statements for the company as a whole with and without the children's department c. 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 $37,000. Would this information affect the decision that you made in Requirement ?

Answer 1

Part A
	Children's department
Sales	$ 1,80,000.00
Cost of goods sold	$   -99,375.00
Gross margin	$    80,625.00
Department manager's salary	$   -26,000.00
Sales commissions	$   -30,400.00
Contribution to profit	$    24,225.00
The children's department should not be eliminated because its contribution margin is $24,225	No

Part B 1
Income statements before the elimination of children's department
	Men's department	women's department	children's department	company total
Sales	$ 6,50,000.00	$ 4,70,000.00	$     1,80,000.00	$ 13,00,000.00
Cost of goods sold	$-2,68,000.00	$ -1,78,400.00	$      -99,375.00	$ -5,45,775.00
Gross margin	$ 3,82,000.00	$ 2,91,600.00	$        80,625.00	$   7,54,225.00
Department manager's salary	$   -57,000.00	$    -46,000.00	$      -26,000.00	$ -1,29,000.00
Sales commissions	$-1,11,200.00	$    -80,600.00	$      -30,400.00	$ -2,22,200.00
Rent on store lease	$   -26,000.00	$    -26,000.00	$      -26,000.00	$     -78,000.00
Store Utilities	$     -9,000.00	$      -9,000.00	$        -9,000.00	$     -27,000.00
Net income (loss)	$ 1,78,800.00	$ 1,30,000.00	$      -10,775.00	$   2,98,025.00
Part B 2
Income statements after the elimination of children's department
	Men's department	women's department	company total
Sales	$ 6,50,000.00	$ 4,70,000.00	$   11,20,000.00
Cost of goods sold	$-2,68,000.00	$ -1,78,400.00	$   -4,46,400.00
Gross margin	$ 3,82,000.00	$ 2,91,600.00	$     6,73,600.00
Department manager's salary	$   -57,000.00	$    -46,000.00	$   -1,03,000.00
Sales commissions	$-1,11,200.00	$    -80,600.00	$   -1,91,800.00
Rent on store lease	$   -39,000.00	$    -39,000.00	$      -78,000.00
Store Utilities	$   -13,500.00	$    -13,500.00	$      -27,000.00
Net income (loss)	$ 1,61,300.00	$ 1,12,500.00	$     2,73,800.00

Due to the elimination of children's department, there is reduction in net income by $24,225 (273,800 - 298,025). Therefore, it should not be eliminated which confirms with requirement a.

Part C

Yes

As the additional income of $37000 is higher than the $24225 contribution margin from the Children’s Department, the Children’s Department should be eliminated.