Zachary Boot Co. sells men\'s, women\'s, and children\'s boots. For each type of

Question

Zachary 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: Children's Department Women's Men' s Department Department $ 490,000 $690,000 $ 230,000 Sales Cost of goods sold Gross margin Department manager's salary Sales commissions Rent on store lease Store utilities (275,000) 415,000 (71,000) (125,200) (40,000) 23,000 155,800 184,000) 306,000 (60,000) (94,600) (40,000) (106,375) 123, 625 (40,000) (37,400) (40,000) 23,000 $ 88,400 (23,000) Net income (loss) (16,775)

Explanation / Answer

Required A:

Contribution Margin (C.M) = Price per unit - variable cost per unit

= or Total sales - variable cost

Mens Department :

CM = Total sales - (Cost of goods sold+ sales commission)

= 690000 - (275000+125200)

= 690000 - 400200

= 289800

Womens Department :

CM = Total sales - (Cost of goods sold+ sales commission)

= 490000 - (184000+94600)

= 490000 - 278600

= 211400

Childrens Department :

CM = Total sales - (Cost of goods sold+ sales commission)

= 230000 - (106375+37400)

= 230000- 143775

= 86225

As per conrtibution cost calculation Children's department is not in the loss. The loss here is due to Fixed cost so 1. we can increase the production 2. reduce the fixed cost 3. or perform both increase production and reduce fixed cost.

Required B1:

Net income = adding together Income of all three departments + [Rent on Store lease and utilities subtracted from Women's and children's department] (Note: while calculating total income of the company these two item's will be subtracted only once because all the three products are sold in single store)

= 155800+88400-16775 + [40000+23000+40000+23000]

= 227425 +126000

= 353425

Required B2:

Particulars

Men’s Department

Women’s Department

Total

Sales

$ 690000

$490000

$1180000

Cost of goods sold

(275000)

(184000)

(293400)

Gross margin (Sales- Cost of goods sold)

415000

306000

886600

Department manager’s salary

(71000)

(60000)

(131000)

Sales commissions

(125200)

(94600)

(219800)

Rent on store lease

(40000)

(40000)

(40000)

Store utilities

(23000)

(23000)

(23000)

Net income (loss)

$155800

$88400

$472800

Required C:

As per above calculations of total income in Required B1 and B2 = Total income of company while taking all three department < Total income of company while excluding children's department.

Now as per this question if we eliminate childrens department and display more adults shoes then income will increase by $51000.

So now total income = 472800+51000

= $523800

So we should eliminate children's department as our net earnings will be increasing.

Particulars

Men’s Department

Women’s Department

Total

Sales

$ 690000

$490000

$1180000

Cost of goods sold

(275000)

(184000)

(293400)

Gross margin (Sales- Cost of goods sold)

415000

306000

886600

Department manager’s salary

(71000)

(60000)

(131000)

Sales commissions

(125200)

(94600)

(219800)

Rent on store lease

(40000)

(40000)

(40000)

Store utilities

(23000)

(23000)

(23000)

Net income (loss)

$155800

$88400

$472800

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