Question

Franklin 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: Men’s Department Women’s Department Children’s Department Sales $ 670,000 $ 490,000 $ 180,000 Cost of goods sold (269,000 ) (179,200 ) (100,375 ) Gross margin 401,000 310,800 79,625 Department manager’s salary (59,000 ) (48,000 ) (28,000 ) Sales commissions (113,200 ) (82,600 ) (31,400 ) Rent on store lease (28,000 ) (28,000 ) (28,000 ) Store utilities (11,000 ) (11,000 ) (11,000 ) Net income (loss) $ 189,800 $ 141,200 $ (18,775 ) Required a. Calculate the contribution margin. 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 $39,000. Would this information affect the decision that you made in Requirement a?

Answer 1

Part A

	Children's department
Sales	180000
Cost of goods sold	(100375)
Gross margin	79625
Department manager's salary	(28000)
Sales commissions	(31400)
Contribution to profit	20225

The children's department should not be eliminated because its contribution margin is $20225

Part B 1

Income statements before the elimination of children's department

	Men's department	women's department	children's department	company total
Sales	670000	490000	180000	1340000
Cost of goods sold	(269000)	(179200)	(100375)	548575
Gross margin	401000	310800	79625	791425
Department manager's salary	(59000)	(49000)	(28000)	(136000)
Sales commissions	(113200)	(82600)	(31400)	(227200)
Rent on store lease	(28000)	(28000)	(28000)	(84000)
Store Utilities	(11000)	(11000)	(11000)	(33000)
Net income (loss)	189800	141200	(18775)	312225

Part B 2

Income statements after the elimination of children's department

	Men's department	women's department	company total
Sales	670000	490000	1160000
Cost of goods sold	(269000)	(179200)	(448200)
Gross margin	401000	310800	711800
Department manager's salary	(59000)	(48000)	(107000)
Sales commissions	(113200)	(82600)	(195800)
Rent on store lease	(42000)	(42000)	(84000)
Store Utilities	(16500)	(16500)	(33000)
Net income (loss)	170300	121700	292000

Due to the elimination of children's department, there is reduction in net income by 20225 (312225-292000). Therefore, it should not be eliminated which confirms with requirement a.
Part C

As the additional income of $39000 is higher than the $20225 contribution margin from the Children’s Department, the Children’s Department should not be eliminated.