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

a)contribution to profit
	department
	men	women	children
sales	700000	500000	230000
less:cost of goods sold	275500	184400	106875
contribution	424500	315600	123125
net profit	161300	94000	-20775
contribution to profit(contribution/profit)	2.6317421	3.357446809	-5.926594465

since the contribution to profit ratio in childrens department is negative,it is better to eliminate the childrens department.

b) 1

net income of the company:-	amount
mens department	161300
womens department	94000
childrens department	-20775
NET INCOME OF THE COMPANY	234525

b)2

net income of the company:-	with childrensdepartment	without childrensdepartment
mens department	161300	161300
womens department	94000	94000
childrens department	-20775	0
NET INCOME OF THE COMPANY	234525	255300

from the above table it is easy to understand that the net income of the company is higher when childrens department is eliminated.

c) if the net earning can increase by 52000 if eliminated children department,then it is better to proceed with that decision as instead loss in children department it can make profitable