Question

1. Fashion Clothing sells clothing, shoes, and accessories at a location in Los Angeles, CA. Information for the just concluded calendar year follows.

                        Clothing                      Shoes               Accessories

Sales                            $850,000         $320,000         $150,000

Less: Variable costs    $510,000         $270,000          $82,500

         Fixed costs          290,000             70,000             42,000

               Total costs  $800,000         $340,000         $124,500

Operating income (loss)$50,000         $(20,000)          $25,500

Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. TWU Clothing will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.

Required:

Your supervisor has asked you to determine whether the shoe department should be closed and the effect upon income if closed.

Answer 1

Existing scenario Particulars Sales Variable costs Fixed costs Total cost Operating Income Clothing Shoes Accessories Total $ 850,000 $ 320,000 $ 150,000 $1,320,000 $ 510,000 $ 270,000 $ 82,500 $ 862,500 $ 290,000 $ 70,000 $ 42,000 $ 402,000 $ 800,000 $ 340,000 $ 124,500 $1,264,500 $ 50,000 $ (20,000) S 25,500 $ 55,500 Profit under new scenario Particulars Clothing Shoes Accessories Total Sales $ 722,500 $ 220,000 $ 942,500 Variable costs $ 433,500 $ 128,000 $ 561,500 Fixed costs $ 290,000 $ 25,000 $ 58,000 $ 373,000 Total cost $ 723,500 $ 25,000 $ 186,000$ 934,500 Operating Income $ (1,000) $ (25,000) $ 34,000 $ 8,000 If show department is closed the profit will decreased by $ 47500 (55,500-8000)