Eliminating a segment
Levene 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 doing so. Last year’s income statements follow.
| Men’s Department | Women’s Department | Children’s Department |
Sales | $600,000 | $420,000 | $160,000 |
Cost of goods sold | (265,500) | (176,400) | (96,875) |
Gross margin | 334,500 | 243,600 | 63,125 |
Department manager’s salary | (52,000) | (41,000) | (21,000) |
Sales commissions | (106,200) | (75,600) | (27,900) |
Rent on store lease | (21,000) | (21,000) | (21,000) |
Store utilities | (4,000) | (4,000) | (4,000) |
Net income (loss) | $151,300 | $102,000 | $(10,775) |
Required
a.Determine whether to eliminate the children’s department.
b. 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 $32,000. Would this information affect the decision that you made in Requirement a? Explain your answer.
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