Niklos 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 $ 500,000 $ 600,000 $ 120,000
Cost of goods sold (210,000 ) (250,000 ) (70,000 )
Gross margin 290,000 350,000 50,000
Department manager's salary (52,000 ) (60,000 ) (24,000 )
Sales commissions (86,000 ) (98,000 ) (18,000 )
Rent on store lease (21,000 ) (21,000 ) (21,000 )
Store utilities (4,000 ) (4,000 ) (4,000 )
Net income (loss) $ 127,000 $ 167,000 $ (17,000 )
Required:
1. Calculate the contribution to profit of the children's department.(Negative amounts should be indicated by a minus sign.)
2. Should the children's department be eliminated?
Yes
No
1. Calculate the net income for the company as the whole with the children's department.
2. Prepare the income statement for the company as the whole without the children's department. (Sunk cost of Children's Department should be allocated equally between the remaining departments.)
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 $20,000. Should the children's department be eliminated?