Decide whether to drop a department (Learning Objective 4)

Knight Fashion in New York operates three departments: Men’s, Women’s, and Accessories. Knight Fashion allocates all fixed expenses (unavoidable building depreciation and utilities) based on each department’s square footage. Departmental operating income data for the third quarter of 2007 are as follows:

The store will remain in the same building regardless of whether any of the departments are dropped. Should Knight Fashion drop any of the departments? Give your reason.

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Department Men's Women's Accessories Total Sales revenue......... Variable expenses............. $105,000 $54,000 $100,000 $259,000 60,000 30,000 80,000 170,000 Fixed expenses 25,000 20,000 25,000 70,000 Total expenses................. 85,000 50,000 105,000 240,000 Operating income (loss).... $20,000 $4,000 $(5,000) $19,000