Home Improvement Company, a retail home store, has two major divisions-outdoors
ID: 2350090 • Letter: H
Question
Home Improvement Company, a retail home store, has two major divisions-outdoors and indoors. Here is the data on their income and expenses: Total Indoor Outdoor Sales $85,000 $50,000 $35,000 Variable expenses 35,000 15,000 20,000 Contribution margin 50,000 35,000 15,000 Fixed expenses: Advertising 5,000 2,000 3,000 Supervisor salaries 19,000 10,000 9,000 Store insurance 2,000 1,000 1,000 General administrative 11,000 8,000 3,000 overhead Total fixed expenses 37,000 21,000 16,000 Net operating income (loss) $13,000 $14,000 (1,000) Due to the loss, the general manager is considering closing the outdoor division and just focusing on the indoor division. If the division were closed, the supervisor salary and the advertising costs could be eliminated. Should the division be closed? Please show your computations to support your answer.Explanation / Answer
continue
eliminate
net income increase(decrease)
sales
85,000
50,000
-35,000
variable expenses
35,000
15,000
20,000
contribution margin
50,000
35,000
-15,000
fixed expenses
37,000
25000
12000
net income
13,000
10,000
-3,000
fixed costs under elminate =2000+10000+2000+11000
answer: They should continue the outdoor division. Eliminating it would decrease net income by 3,000.
continue
eliminate
net income increase(decrease)
sales
85,000
50,000
-35,000
variable expenses
35,000
15,000
20,000
contribution margin
50,000
35,000
-15,000
fixed expenses
37,000
25000
12000
net income
13,000
10,000
-3,000
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