Prior to last year, Leastan Company had not kept departmental income statements. To achieve better management control, the company decided to install department-by-department accounts. At the end of last year, the new accounts showed that although the business as a whole was profitable, the Dry Goods Department had shown a substantial loss. The income statement for the Dry Goods Department, shown here, reports on operations for last year.

Additional Computations:
aAll sales staff are compensated on straight commission at a uniform 6 percent of all sales.
bRent is charged to departments on a square-foot basis. The company rents an entire building, and the Dry Goods Department occupies 15 percent of the building.
cAssessed annually on the basis of average inventory on hand each month.
d5 percent of cost of departmental equipment.
eAllocated on basis of departmental sales as a fraction of total company sales.
fBased on average inventory quantity multiplied by the company€™s borrowing rate for three-month loans.

Analysis of these results has led management to suggest that it close the Dry Goods Department. Members of the management team agree that keeping the Dry Goods Department is not essential to maintaining good customer relations and supporting the rest of the company€™s business. In other words, eliminating the Dry Goods Department is not expected to affect the amount of business done by the other departments.
What action do you recommend to management of Leastan Company in the shortrun?

Transcribed Image Text:

LEASTAN COMPANY Dry Goods Department Partial Income Statement $250,000 Cost of Goods S 187,500 Gross Margin $62,500 Payroll, Direct Labor, and Supervision Commissions of Sales Staff Rent State Taxes Insurance on Inventory Depreciation Administration and General Officee Interest for Inventory Carrying Costs 16,500 15,000 13,000 1,500 2,000 3,500 11,000 2,500 Total Costs Loss before Allocation of Income Taxes 65,000 $ (2,500)