Homework Answers
a.
| Contribution margin lost on eliminating the Children'd Department | $ (54,225) |
| Fixed cost avoided | 32,000 |
| Net contribution margin lost | $ ( 22,225 ) |
No, the Children's Department should not be eliminated as net contribution margin decreases by $ 22,225. This would cause net income for the company as a whole to decrease by $ 22,225.
b-1. Net income as a whole for the company before eliminating the Children's Department = $ 290,625.
b-2 :
| Income Statement Without the Children's Department | |||
| Total | Men's Department | Women's Department | |
| Sales | $1,180,000 | $ 690,000 | $ 490,000 |
| Cost of Goods Sols | 451,800 | 271,000 | 180,800 |
| Sales Commission | 203,800 | 117,200 | 86,600 |
| Contribution Margin | 524,400 | 301,800 | 222,600 |
| Fixed Costs | |||
| Department Managers Salary | 115,000 | 63,000 | 52,000 |
| Rent on Store Lease | 96,000 | 48,000 | 48,000 |
| Store Utilities | 45,000 | 22,500 | 22,500 |
| Total Fixed Costs | 256,000 | 133,500 | 122,500 |
| Net Operating Income | $ 268,400 | $ 168,300 | $ 100,100 |
c. Yes. As the increase of $ 43,000 in the store's net earnings exceeds the decrease of $ 22,225, the Children's Department should be eliminated.
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