Question

The ABC department store has three major product lines: hardware, clothing, and sporting goods. The store is considering dropping the clothing line because the income statement shows that it is operating at a loss. Note the income statement for these product lines below: Hardware Clothing Sporting Goods Total Sales $10,000 $15,000 $25,000 $50,000 Less: Variable costs $6,000 $8,000 $12,000 $26,000 Contribution Margin $4,000 $7,000 $13,000 $24,000 Less: Fixed costs Direct $2,000 $6,500 $4,000 12,500 Allocated $1,000 $1,500 $2,500 $5,000 Total fixed costs $3,000 $8,000 $6,500 $17,500 Net Income $1,000 ($1,000) $6,500 $6,500 Should the store drop the clothing line of business? Explain using the sales and cost data above. You have been provided with two areas in the course to discuss and collaborate: A group discussion forum and this wiki collaboration area. Only group members have access to these areas and will be able to see the discussion you have and the work you do within these areas. You are also free to use tools outside of the course, such as Google Docs, Yammer, etc. if your group chooses to do so. Your final PowerPoint presentation should consist of 3-4 slides and is due in Unit 7. You will have the next 2 units to work together to create the PowerPoint. Once you’re finished, everyone in your group must post a copy of the final presentation in the Group Activity Submission area in Unit 7. Your PowerPoint content should look professional. Check all content for grammar, spelling and to be sure that you have properly cited all resources (in APA format) used in the creation of the presentation.

Answer 1

Income Statement(GIVEN)	Hardware	Clothing	Sporting Goods	Total
Total sales	10000	15000	25000	50000
Less: Variable costs:	6000	8000	12000	26000
Contribution Margin	4000	7000	13000	24000
Less: Fixed Costs:
Direct	2000	6500	4000	12500
Allocated	1000	1500	2500	5000
Total Fixed costs	3000	8000	6500	17500
Net Income	1000	-1000	6500	6500
While measuring profitability of operations of different divisions,the divisional heads must be held responsible for only those costs which are under their control , for incurring or otherwise--ie. Saving or spending.
Allocated costs are not to be considered while assessing the profitability of individual divisions.
So, recasting the given Income statement,
	Hardware	Clothing	Sporting Goods	Total
Total sales	10000	15000	25000	50000
Less: Variable costs:	6000	8000	12000	26000
Contribution Margin	4000	7000	13000	24000
Less: Direct Fixed costs	2000	6500	4000	12500
Divisional contribution	2000	500	9000	11500
Less: H.O.Fixed costs				5000
Net Income				6500
It can be seen that the Clothing Division ,is not only making a profit of $ 500 --but also, it is contributing towards meeting the general Office fixed costs of $ 6500.
If it is closed, the result will be:
Contribution loss	-7000
Savings in divisional fixed costs,if closed (assumed)	6500
Net loss	-500
Net resultant profit for ABC as a whole will be
(2000+9000)-5000=
6000
ie. A decrease of $ 500 in Net income.
So,
Recommendation: Not to close the Clothing Division.