Question

Perez 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	$	690,000			$	490,000			$	190,000
Cost of goods sold		(271,000	)			(180,800	)			(102,375	)
Gross margin		419,000				309,200				87,625
Department manager’s salary		(63,000	)			(52,000	)			(32,000	)
Sales commissions		(117,200	)			(86,600	)			(33,400	)
Rent on store lease		(32,000	)			(32,000	)			(32,000	)
Store utilities		(15,000	)			(15,000	)			(15,000	)
Net income (loss)	$	191,800			$	123,600			$	(24,775	)

Required

1. a. Calculate the contribution margin. 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 $43,000. Would this information affect the decision that you made in Requirement a?

Answer 1