Western Boot Co. sells men’s, women’s, and children’s boots. For each type of bo
ID: 2590091 • 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:
Required
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?
ARE THESE CORRECT?
A.
B1.
B2
C.Will the decision made in Requirement a, be affected? YES?
Men' s Women' s Children' s Department Department $ 250,000 (105,000) 145,000 (26,000) (43, 000) (10,500) (2,000) Department s 300,000 (125,000) 175,000 (30,000) (49,000) (10, 500) (2,000) S 60,000 Sales Cost of goods sold Gross margin Department manager's salary Sales commissions Rent on store lease Store utilities (35,000) 25,000 (12,000) (9,000) (10, 500) (2,000) $ (8,500) Net income (loss) S 63,500 S 83,500Explanation / Answer
Answer:
a.
Calculation of the contribution margin for children department
Children’s Department
Sales
60000
Cost of goods sold
-35000
Gross margin
25000
Less:
Department manager’s salary
-12000
Sales commissions
-9000
Contribution margin
4000
children department should not eliminated because it show contribution margin of $4000
_______________________________________________
b)
Calculate the net income for the company as a whole with the children's department.
Profit
Men’s
Department
63500
Women’s Department
83500
Children’s Department
-8500
Total Profit
138500
net income for the company as a whole with the children's department. = $138,500
__________________________________________________
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.
first of all we prepare income statements for the company as a whole with children’s department.
Men’s
Department
Women’s Department
Children’s Department
Total
Sales
250000
300000
60000
610000
Cost of goods sold
-105000
-125000
-35000
-265000
Gross margin
145000
175000
25000
345000
Department manager’s salary
-26000
-30000
-12000
-68000
Sales commissions
-43000
-49000
-9000
-101000
Rent on store lease
-10500
-10500
-10500
-31500
Store utilities
-2000
-2000
-2000
-6000
Net income (loss)
63500
83500
-8500
138500
Now we will prepare income statements for the company as a whole without the children’s department.
Men’s
Department
Women’s Department
Total
Sales
250000
300000
550000
Cost of goods sold
-105000
-125000
-230000
Gross margin
145000
175000
320000
Department manager’s salary
-26000
-30000
-56000
Sales commissions
-43000
-49000
-92000
Rent on store lease
-15750
-15750
-31500
Store utilities
-3000
-3000
-6000
Net income (loss)
57250
77250
134500
children department should not be eliminated because it show decrease in net income by $4000
___________________________________________________________---
C)
If management estimates that a wider selection of adult boots would increase the store’s net earnings by $10,000 then children department should be eliminated
Children’s Department
Sales
60000
Cost of goods sold
-35000
Gross margin
25000
Less:
Department manager’s salary
-12000
Sales commissions
-9000
Contribution margin
4000
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