Question

S8-5 Decide whether to discontinue a department (Learning Objective 4) Mila Fashion in New York operates three departments: Men's, Women's, and Accessories. Mila Fashion allocates all fixed expenses (unavoidable building depreciation and utilities) based on each department's square footage. Departmental operating income data for the third quarter of the current year are as follows: WN Mila Fashions Product Line Contribution Margin Income Statement For the Year 6 7 Sales revenue 8 Less: Variable expenses 9 Contribution margin 10 Less: Fixed expenses 11 Operating income 12 Men's 109,000 59,000 50,000 24,000 26,000 Product lines Women's $ 56,000 30,000 26,000 18,000 8,000 Accessories $ 98,000 90,000 8,000 25,000 $ (17,000) Company Total $ 263,000 179,000 84,000 67,000 17,000 ulu uuestes The store will remain in the same building regardless of whether any of the depart- ments are discontinued. Should Mila Fashion discontinue any of the departments? Give your reason.

Answer 1

Perform the analysis as follows: с 98,000 в M fashions Analysis of Dropping the Accessories Department 3 Expected decrease in revenues $ 4 Expected decrease in expenses 5 Expected decraese in variable expenses $ 90,000 6 Expected decrease in fixed expenses $ Expected decrease in total expenses $ 8 Decrease in operating income S 90,000 8,000 Fixed cost would be incurred the same way, and therefore dropping accessories division would cause $8000 loss as it is still contributing 8000 towards the total contribution of $67,000. Hence, no division should be dropped as all three are still contributing towards contribution.