Question

Zachary 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.

	Men’s Department				Women’s Department				Children’s Department
Sales	$	690,000			$	490,000			$	230,000
Cost of goods sold		(275,000	)			(184,000	)			(106,375	)
Gross margin		415,000				306,000				123,625
Department manager’s salary		(71,000	)			(60,000	)			(40,000	)
Sales commissions		(125,200	)			(94,600	)			(37,400	)
Rent on store lease		(40,000	)			(40,000	)			(40,000	)
Store utilities		(23,000	)			(23,000	)			(23,000	)
Net income (loss)	$	155,800			$	88,400			$	(16,775	)

Required

1. a. Calculate the contribution to profit. Determine whether to eliminate the children’s department.

2. b-1. Calculate the net income for the company as a whole with the children's department.

3. 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.

4. 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 $51,000. Would this information affect the decision that you made in Requirement a?

Answer 1

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Part a
Sales	$            230,000
Cost of goods sold	$          (106,375)
Gross margin	$            123,625
Department manager’s salary	$            (40,000)
Sales commissions	$            (37,400)
Contribution to profit	$              46,225
Since department is contribution $46,225 to profit, it should not be closed
Part b1
Before Elimination:
	Men’s	Women’s	Children’s	Company
	Department	Department	Department	Total
Sales	$            690,000	$            490,000	$            230,000	$   1,410,000
Cost of goods sold	$          (275,000)	$          (184,000)	$          (106,375)	$     (565,375)
Gross margin	$            415,000	$            306,000	$            123,625	$       844,625
Department manager’s salary	$            (71,000)	$            (60,000)	$            (40,000)	$     (171,000)
Sales commissions	$          (125,200)	$            (94,600)	$            (37,400)	$     (257,200)
Rent on store lease	$            (40,000)	$            (40,000)	$            (40,000)	$     (120,000)
Store utilities	$            (23,000)	$            (23,000)	$            (23,000)	$       (69,000)
Net income (loss)	$            155,800	$              88,400	$            (16,775)	$       227,425
Part b2
After Elimination:
	Men’s	Women’s	Children’s	Company
	Department	Department	Department	Total
Sales	$            690,000	$            490,000	$                        -	$   1,180,000
Cost of goods sold	$          (275,000)	$          (184,000)	$                        -	$     (459,000)
Gross margin	$            415,000	$            306,000	$                        -	$       721,000
Department manager’s salary	$            (71,000)	$            (60,000)	$                        -	$     (131,000)
Sales commissions	$          (125,200)	$            (94,600)	$                        -	$     (219,800)
Rent on store lease	$            (60,000)	$            (60,000)	$                        -	$     (120,000)
Store utilities	$            (34,500)	$            (34,500)	$                        -	$       (69,000)
Net income (loss)	$            124,300	$              56,900	$                        -	$       181,200
Income is reduced by $46,225 (From $227,425 to $181,200)
Part c
Yes, since income of $51,000 is greater than decrease in income of $46,225, it should be eliminated