Question

Gia Fashion operates three departments Men's, Women's, and Accessories. Departmental operating income data for the third quarter of the current year are as follows: (Click the icon to view the data.) Assume that the fixed expenses assigned to each department include only direct foed costs of the department (rather than unavoidable fixed costs): • Salary of the department's manager - Cost of advertising directly related to that department Gila Fashion discontinues a department, it will not incur these foxed expenses. Under these circumstances, should Gita Fashion discontinue any of the departments? Give your reason Contribution margin lost if Accessories is discontinued Less: Fixed cost savings i Accessories is discontinued Operating income Accessories is discontinued Under these circumstances, should Gila Fashion drop any of the departments? Decision: Gia Fashion

Answer 1

Since Men's and Women's departments are yielding profits, they should not be discontinued.

Effect of discontinuing accessories department

Contribution margin lost if accessories department is discontinued	11,000
Less: Fixed costs savings if accessories department is discontinued	26,000
Operating income increase if accessories department is discontinued	$15,000

Hence, Gila Fashions should discontinue accessories department.

Please ask if you have any query related to the question. Thank you