Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Information for the just concluded calendar year follows.
|
Clothing
|
Shoes
|
Accessories
|
|
Sales
|
$ 850,000
|
$ 320,000
|
$ 150,000
|
|
Less: Variable Costs
|
$ 510,000
|
$ 270,000
|
$ 82,500
|
|
Fixed Costs
|
290,000
|
70,000
|
42,000
|
|
Total Costs
|
$ 800,000
|
$ 340,000
|
$ 124,500
|
|
Operating income (loss)
|
$ 50,000
|
$ (20,000)
|
$ 25,500
|
Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophistication Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.
Required:
Determine whether the shoe department should be closed.