LO 6-4 excel Problem 6-28A Eliminating a segment Western Boot Co. sells men\'s,
ID: 2568133 • Letter: L
Question
LO 6-4 excel Problem 6-28A Eliminating a segment 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: CHECK FIGURE a. Contribution to profit: $4,000 Men's Department EITT Sales Cost of goods sold Gross margin Department manager's salary Sales commissions Rent on store lease Store utilities Net income (loss) $ 250,000 (105,000) 145,000 (26,000) (43,000) (10,500) (2,000) $ 63,500 Women's Department $ 300,000 (125,000) 175,000 (30,000) (49,000) (10,500) (2,000) $ 83,500 Children's Department $ 60,000 (35,000) 25,000 (12,000) |(9,000) (10,500) (2,000) $ (8,500) Required a. Determine whether to eliminate the children's department. b. 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. Eliminating the children's department would increase space available to display men's and wom- en'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? Explain your answer.Explanation / Answer
Req A. Net Operating income earned from Children department: Sales revenue of deptt 60,000 Less: Relevant cost of Deptt: Cost of Goods sold 35,000 Sales Commission 9,000 Department manager Salary 12,000 Contribution earned by Children Department 4,000 Note: COGS, Department manager salary, sales commission, are relevant to department and these will not be incurred when dept is closed. Note: However, Rent on Store lease and utilities expense, is a overall expense of the company as a whole, which has been apportioned to the various deptt. These will not be reduced for the company as a whole. Hence, will not be deducted for computing the deptt earning for decision making. ReqB. Alternative -1: All the three department are working Alternative-2: Children department has been closed. Alternative-1 Alternative -2 Differential Revenue Sales Revenue 610,000 550,000 -60000 Less: Cost of Goods sold 265,000 230,000 35000 Gross Margin 345,000 320,000 -25,000 Department Manager Salary 68000 56000 12000 Sales Commission 101,000 92,000 9000 Rent on store lease 31,500 31,500 0 Utilities on Store 6,000 6,000 0 Net Income 138500 134500 -4000 hence, Children deptt should not be closed as it will lead to drop in income by $ 4,000 for company as a whole Req C. However, if the company is able to earn the additional net earnings of $ 10,000 after closing down the children department. Then it is beneficial to close the children department, as it will lead to increase in the net income of the company by $ 6,000 (i.e. 10,000 - 4,000 loss of closing)
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