Question

Stuart 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	$	710,000			$	490,000			$	210,000
Cost of goods sold		(273,000	)			(182,400	)			(104,375	)
Gross margin		437,000				307,600				105,625
Department manager’s salary		(67,000	)			(56,000	)			(36,000	)
Sales commissions		(121,200	)			(90,600	)			(35,400	)
Rent on store lease		(36,000	)			(36,000	)			(36,000	)
Store utilities		(19,000	)			(19,000	)			(19,000	)
Net income (loss)	$	193,800			$	106,000			$	(20,775	)

Required

1. a. Calculate the contribution to profit. Determine whether to eliminate the children’s department.

2. b-1. Calculate the net income for the company as a whole with the children's department.

3. 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.

4. 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 $47,000. Would this information affect the decision that you made in Requirement a?

Answer 1

Answer 1

Contribution to profit (loss) (36000 + 19000 - 20775)	$ 34,225
children's department be eliminated?	NO

Answer b-1

$ 279,025

Calculations:

	Men’s Department	Women’s Department	Children’s Department	Total
Sales	$                710,000	$                       490,000	$                       210,000	$ 1,410,000
Cost of goods sold	$                273,000	$                       182,400	$                       104,375	$    559,775
Gross margin	$                437,000	$                      307,600	$                       105,625	$    850,225
Department manager’s salary	$                  67,000	$                         56,000	$                          36,000	$    159,000
Sales commissions	$                121,200	$                         90,600	$                          35,400	$    247,200
Rent on store lease	$                  36,000	$                         36,000	$                          36,000	$    108,000
Store utilities	$                  19,000	$                         19,000	$                          19,000	$      57,000
Net income (loss)	$                193,800	$                      106,000	$                        (20,775)	$    279,025

Answer b-2

$ 244,800

Calculations:

	Men’s Department	Women’s Department	Children’s Department	Total
Sales	$                710,000	$                       490,000	$                                  -	$ 1,200,000
Cost of goods sold	$                273,000	$                       182,400	$                                  -	$    455,400
Gross margin	$                437,000	$                      307,600	$                                  -	$    744,600
Department manager’s salary	$                  67,000	$                         56,000	$                                  -	$    123,000
Sales commissions	$                121,200	$                         90,600	$                                  -	$    211,800
Rent on store lease	$                  36,000	$                         36,000	$                          36,000	$    108,000
Store utilities	$                  19,000	$                         19,000	$                          19,000	$      57,000
Net income (loss)	$                193,800	$                      106,000	$                        (55,000)	$    244,800

Answer c

Yes, this information would affect the decision in requirement a.

Contribution to profit (loss)	$ (5775)
children's department be eliminated?	YES

In case of any doubt, please comment.