Emily has produced the following income statement for the ladies shoe department of a large department store:

Sales $1,500,000

Less: variable expense 700,000

Contribution margin 800,000

Less: fixed expenses:

Wages $550,000

Insurance on inventory 20,000

Advertising 200,000 770,000

Net operating income $ 30,000

Compared with other departments, the ladies shoe department has poor profitability. Management is considering dropping the department entirely. If the department is dropped, a job has to be created elsewhere for one employee who has been with the firm for many years. This employee has an annual salary of $40,000 and many years until retirement.

Required:

Prepare an analysis to determine whether the ladies shoe department should be dropped, and make a recommendation to management about this decision.