Western Boot Co. sells men’s, women’s, and children’s boots. For each type of bo
ID: 2556325 • Letter: W
Question
Western 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:
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 $10,000. Would this information affect the decision that you made in Requirement a?
Men’s Department Women’s Department Children’s Department Sales $ 250,000 $ 300,000 $ 60,000 Cost of goods sold (105,000 ) (125,000 ) (35,000 ) Gross margin 145,000 175,000 25,000 Department manager’s salary (26,000 ) (30,000 ) (12,000 ) Sales commissions (43,000 ) (49,000 ) (9,000 ) Rent on store lease (10,500 ) (10,500 ) (10,500 ) Store utilities (2,000 ) (2,000 ) (2,000 ) Net income (loss) $ 63,500 $ 83,500 $ (8,500 )Explanation / Answer
No, children department should not be eliminate because co has positive contribution. Fixed cost would be incurred whether we have to continue children deptt or not.
b-. Calculation of Net Income of the company
Sales 610000
COGS 265000
Salary 68000
commission 101000
Rent 31500
Store utiliies 6000
Net Income 138500
3. In part (a), contribuion of children Deptt is 9000 . if co eliminate children deptt then co will suffer loss of 9000 as a contribution margin but due to elimination co will get addittional space and earn 10000 from additional space
Extra profit would be 10000 - 9000 = 1000 from eliminating children deptt
Men’s Department Women’s Department Children’s Department Sales 250000 300000 60000 Cost of goods sold 105000 125000 30000 Department manager’s salary 26000 30000 12000 Sales commissions 43000 49000 9000 Contribution Margin 76000 96000 9000Related Questions
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