Question

Gibson 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: Children's Women's Men's Department $660,000 Department Department 480,000 (179,600) 300,400 (49,000) (83,600) (29,000) $ 200,000 (100,875) 99,125 (29,000) Sales Cost of goods sold Gross margin Department manager's salary Sales commissions (269,500) 390,500 (60,000) (114,200) (29,000) (12,000) (31,900) (29,000) (12,000) Rent on store lease (12,000) $ 126,800 Store utilities $ (2,775) 175,300 Net income (loss) 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 caildren's department. b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company 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 $40,000. Would this information affect the decision that you made in Requirement a? Complete this question by entering your answers in the tabs below. Required A Required B2 Required C Required B1 Calculate the contri bution margin. Determine whether to eliminate the children's department. (Negative am indicated by a minus sign.) Contribution to profit (loss) Should the children's department be eliminated?

Answer 1

a.

Contribution Margin =Sales - Variable Cost

	Men's Department	Women's Department	Children's Department
	$	$	$
Sales	6,60,000	4,80,000	2,00,000
Less : Variable Cost	-383700	-263200	-132775
Contribution Margin	2,76,300	2,16,800	67,225
Total Contribution Margin		5,60,325

Variable Cost	Men's Department	Women's Department	Children's Department
	$	$	$
Cost of Goods Sold	269500	179600	100875
Sales Commissions	114200	83600	31900
Total Variable Cost	383700	263200	132775

Children's department contribution margin is $ 67,225 which means it cover at least fixed cost equivalent to contribution margin.

It would nt be advisable to close /eliminate children's department

B1

Net Income	with children department
Sales:
Men's Department	6,60,000
Women's Department	4,80,000
Children's Department	2,00,000	13,40,000
Less : Cost of goods Sold
Men's Department	269500
Women's Department	179600
Children's Department	100875	549975
Gross Margin		7,90,025
Less :
Department Manager's Salary
Men's Department	60000
Women's Department	49000
Children's Department	29000	138000
Sales Commision
Men's Department	114200
Women's Department	83600
Children's Department	31900	229700
Rent on store lease
Men's Department	29000
Women's Department	29000
Children's Department	29000	87000
Store's Utilities
Men's Department	12000
Women's Department	12000
Children's Department	12000	36000
Net Income		2,99,325

b2

Net Income	without children department
Sales:
Men's Department	6,60,000
Women's Department	4,80,000	11,40,000
Less : Cost of goods Sold
Men's Department	269500
Women's Department	179600	449100
Gross Margin		6,90,900
Less:
Department Manager's Salary
Men's Department	60000
Women's Department	49000
Children's Department	29000	138000
Sales Commision
Men's Department	114200
Women's Department	83600	197800
Rent on store lease
Men's Department	29000
Women's Department	29000
Children's Department	29000	87000
Store's Utilities
Men's Department	12000
Women's Department	12000
Children's Department	12000	36000
Net Income		2,32,100

Net income with children's department is more than net income without children's department.

So it is advisable to continue children department due to reason that fixed cost such as rent,store utilities ,manager salary will be incurred . c.

With eliminating childrens department net income would be $2,32,100 +$40,000=$262,100 which is less than net income $2,99,325.

So it is advisable not to eliminate children's department