Our client, ABC Company, is a merchandiser of items needed by children ages 3 to 10. It sells clothing, toys, books, and media which includes DVDs and CDs. ABC brought to us its budget for last year and its actual results for last year in total dollars for each department, total dollars for the company, and the selling price and cost per unit sold by department. It also provided us with the following information.

• The selling, G & A, depreciation, and interest expense are fixed costs. If a department is closed, the selling, depreciation, and interest expense would have to be allocated to the remaining departments. The G & A for that department would no longer be needed.
• The company, as a whole, exceeded its budget, but ABC is concerned about the Books and Media departments as neither met the budget regarding net income. Toys did very well due to the closing of a major toy store. Clothing also did well as children out grow their clothes, wear them out, and styles and seasons change.
• The book department was located at the very back of the store, and perhaps, that is why so few books sold. Could there be other reasons?
• The media department did not do as well as expected either. It is located next to the books but is larger and more visible.
• ABC wants to know if it should close both Books and Media, only close one, or leave them both open. What strategy do you suggest?
• Is there another department that ABC should consider opening to bring more traffic into the store?
• If the decision is to keep them open, how many books and media need to be sold before realizing a profit. It would be good to know these numbers for clothing and toys also to provide an incentive to sales personnel.

The following data were provided by our client.

ABC Company Department Information For the Prior Year Clothing Toys Books Media Total Total Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Net Sales $2,000,000 $2,100,000 $3,000,000 $3,500,000 $200,000 $50,000 $ 700,000 660,000 $5,900,000 $6,310,000 Cost of Good Sold 1,000,000 900,000 900,000 980,000 120,000 40,000 280,000 510,000 2,300,000 2,430,000 Gross Margin $1,000,000 $1,200,000 $2,100,000 $2,520,000 $ 80,000 $10,000 $420,000 $150,000 $3,600,000 $3,880,000 Operating expenses Selling, G&A (50,000) (50,000) (75,000) (75,000) (5,600) (5,000) (17,500) (17,500) (147,500) (147,500) Depreciation (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (40,000) (40,000) Operating income $ 940,000 $1,140,000 $2,015,000 $2,435,000 $ 65,000 $ (5,600) $392,500 $122,500 $3,412,500 $3,692,500 Interest expense (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (20,000) (20,000) Income before income taxes $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $(10,000) $387,500 $ 117,500 $3,392,500 $3,672,500 Provision for income taxes (746,350) (807,950) Net ir corte $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $(10,000) $387,500 $117,500 $2,646,150 $2,864,550 Selling price per Unit Cost per Unit Gross Margin per Unit Clothing Toys Books Media Budget Actual Budget Actual Budget Actual Budget Actual $ 20 $ 21$ 50 $ 50 $ 10 $ 5$ 25 22 10 9 15 12 6 4 10 17 10 $ 12 $ 35 $ 38 $ 4 $ 1 $ 15 $ 5 $