Hambley’s Toy Store is on Regent Street in London. It has a magic department near the main door. Management is considering dropping the magic department, which has consistently shown an operating loss. The predicted income statements, in thousands of pounds (£), follow (for ease of analysis, only three product lines are shown):

The £310,000 of fixed expenses include the compensation of magic department employees of £100,000. These employees will be released if the magic department is abandoned. All equipment is fully amortized, so none of the £310,000 pertains to such items. Furthermore, disposal values of the equipment will be exactly offset by the costs of removal and remodelling.
If the magic department is dropped, the manager will use the vacated space for either more general merchandise or more electronic products. The expansion of general merchandise would not entail hiring any additional salaried help, but more electronic products would require an additional person at an annual cost of £25,000. The manager thinks that sales of general merchandise would increase by £300,000; electronic products, by £200,000. The manager’s modest predictions are partially based on the fact that she thinks the magic department has helped lure customers to the store and thus improved overall sales. If the magic department is closed, that lure would be gone.
Should the magic department be closed? Explain, showing computations.

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TOTAL GENERAL MERCHANDISE ELECTRONIC MAGIC PRODUCTS DEPARTMENT Sales 6,000 5,000 Variable expenses 4,090 3,500 Contribution margin 1,910 (32%) 1,500 (30%) Fixed expenses (compensation, amortization, property taxes, insurance, etc.) Operating income 400 200 600 390 200 (50% ) 210 (35%) 1,110 750 50 310 800 750 150 (100)