Benson 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:
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. Calculate the contribution margin. Determine whether to eliminate the children’s department.
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b-1. Calculate the net income for the company as a whole with the children's department.
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b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company without the children’s department.
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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 $35,000. Would this information affect the decision that you made in Requirement a?
Homework Answers
| Contribution Margin - Sales - Variable costs | |||
| =Sales - cost of goods sold - department manager's salary - sales commission | |||
| = | 18,225 | ||
| No, since positive contribution margin | |||
| b-1 | |||
| Net Income as a whole = 167800+118800-12775 = $273,825 | |||
| b-2 | |||
| Men | Women | Company | |
| Sales | 630,000 | 450,000 | 1,080,000 |
| COGS | -267,000 | -177,600 | -444,600 |
| Gross Margin | 363,000 | 272,400 | 635,400 |
| Salary | -55,000 | -44,000 | -99,000 |
| Sales Commission | -109,200 | -78,600 | -187,800 |
| Rent | -36,000 | -36,000 | -72,000 |
| Utilities | -10,500 | -10,500 | -21,000 |
| Net Income | 152,300 | 103,300 | 255,600 |
| Since fixed costs of rent and utilities will not be reduced, they are allocated to remaining divisions | |||
| Yes, better to discontinue as additional earnings are higher than contribution margin | |||
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