Fabric Wholesalers Ltd operates three departments. The accessories department has not been performing very well and has shown a loss for the past 3 years according to the company’s income statement. Competition in the accessories line is strong and the margins are low. The departmental income statement for the year ended 30 June 2020 was as follows.

Indirect expenses of $53 000 are avoidable if the accessories department is eliminated.
Required

(a) Calculate the departmental margin for the accessories department.

(b) Should the accessories department be closed down? Justify your answer.

(c) Prepare an income statement for the two remaining departments, assuming the accessories department is dropped, to confirm your results in requirement (b).

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INCOME Sales Less: Cost of sales GROSS PROFIT Direct expenses Indirect expenses PROFIT (LOSS) FABRIC WHOLESALERS LTD Income Statement for the year ended 30 June 2020 Accessories department $488 000 366 000 122 000 (56 900) (78600) $ (13500) Other two departments $1500 200 671 200 829 000 (235 500) (198200) $ 395 300