(L.OBJ. 3) Making dropping a product and product-mix decisions [10 min] Consider Linda...

(L.OBJ. 3) Making dropping a product and product-mix decisions [10 min]

Consider Linda Fashions from Short Exercise 19-4. Assume that Linda Fashions allocates all fixed costs based on square footage. If Linda Fashions drops one of the current departments, it plans to replace the dropped department with a shoe department. The company expects the shoe department to produce $76,000 in sales and have $54,000 of variable costs. Because the shoe business would be new to Linda Fashions, the company would have to incur an additional $7,100 of fixed costs (advertising, depreciation on new shoe display racks, and SO forth) per period related to the department.

Requirements

1. What is the potential profit from the new shoe department?

2. Should Linda Fashions consider replacing one of its existing departments with a new shoe department?