Question

Western 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 Gross margin Department manager's salary Sales commissions Rent on store lease Store utilities Net income (loss) Men's Department $ 700,000 (275,500) 424,500 (72,000) (126,200) (41,000) (24,000) $ 161,300 Women's Department $ 500,000 (184,400) 315,600 (61,000) (95,600) (41,000) (24,000) $ 94,000 Children's Department $ 230,000 (106,875) 123, 125 (41,000) (37,900) (41,000) (24,000) $ (20,775) Required a. Calculate the contribution to profit. 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 Requirement a 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 $52,000. Would this information affect the decision that you made in Requirement a?

Answer 1

Children's Department Sales Cost of goods sold Gross margin Department manager's salary Sales commissions contribution to profit 230,000 -106,875 123,125 -41,000 -37,900 44,225 a-2)should the children's department be eliminated? No, as the contribution to profit is positive. b-1) Men's Department Women's Department Children's Department Net income/(loss) for the company as a whole 161300 94000 -20775 234525 b-2 Men's Women's Total Department Department A+B 700,000 500,000 1,200,000 -275,500 -184,400 459,900 Sales Cost of goods sold Gross margin 424,500 315,600 740,100 Department manager's salary -72,000 -61,000 -133,000 Sales commissions -126,200 -95,600 -221,800 Rent on store lease -61,500 -61,500 -123,000 Store utilities -36,000 -36,000 -72,000 Net income (loss) 128,800 61,500 190,300 Net income without children dept. Is lower which confirms the conclusion arrived in part a-1. c) yes, children de partment should be eliminated as the increase in net earning ($52000) is greater than contribution to profit ($44225).