Certain operating information is shown below for Palmer Department Store:

The managers are disappointed with the operating results of department A. They do not believe that competition will permit raising prices; however, they believe that spending 

\($21,000\) more for promoting this department’s products will increase the physical volume of products sold by 20%.
An alternative is to discontinue department A and use the space to expand department B. It is believed that department B’s physical volume of products sold can thus be increased 37.5%. Special sales personnel are needed, however, and department B’s traceable expenses would increase by \($90,000\) .
Neither alternative would appreciably affect the total common departmental expense.
Required

a. Calculate the contribution now being made to common expenses by department A, by department B, and by the combination of other departments.

b. Which of the two alternatives should management choose: increase promotional outlays for department A or discontinue department A and expand department B? Support your answer with calculations.

Transcribed Image Text:

Sales. Traceable expenses. Common expenses Gross profit percentage Department A Department B $600,000 105,000 $900,000 165,000 90,000 120,000 30% 40% All Other Departments $2,100,000 600,000 300,000 50%