Question: 1. Baird 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 |
$620,000 |
$440,000 |
$160,000 |
| Cost of goods sold |
(266,500) |
(177,200) |
(97,875) |
| Gross margin |
353,500 |
262,800 |
62,125 |
| Department manager's salary |
(54,000) |
(43,000) |
(23,000) |
| Sales commissions |
(108,200) |
(77,600) |
(28,900) |
| Rent on store lease |
(23,000) |
(23,000) |
(23,000) |
| Store utilities |
(6,000) |
(6,000) |
(6,000) |
| Net income (loss) |
$162,300 |
$113,200 |
$(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 $34,000. Would this information affect the decision that you made in Requirement a?