PART A

You are a retailer that has multiple departments. While analyzing the net income on a department by department level, you realize that one department is operating at a net loss. Determine whether shutting down the department makes sense and the estimated net impact to the business if this department is shut down:

For 12 Months of Operations

Dept A Sales $300,000

Dept B $350,000 297,500 $52,500

28,000 6,000 5,000 5,000

$8,500

Dept C $250,000 137,500 $112,500

28,000 6,000 5,000 5,000

$68,500

Total $900,000

639,000 $261,000

84,000 18,000 15,000 15,000

$129,000

Cost of Goods Sold Gross Margin Operating Expenses:

Salaries Utilities Depreciation Other

Operating Profit (Loss)

Additional Information:

204,000 $96,000

28,000 6,000 5,000 5,000

$52,000

a)

If Department B is closed, their sales and cost of goods sold will drop to zero.

b)

Since some customers shop at our store because we offer many different products, we estimate the foot traffic in the store will also drop. Therefore, we expect to lose $25,000 in sales between Dept A & C. The projected cost of goods sold on these forgone sales is 60%

c)

Salaries Expense for the total company is evenly split between all departments. If you close Dept B, you can cut some staff hours. The estimated total Salaries Expense for the organization would then drop to $65,000.

d)

Total Utilities Expense will remain the same as you will continue to operate from the same building and incur the same heating and lighting expenses for the building as a whole.

e)

The capital assets for Dept B has little to no resale value. The assets currently being used by Dept B will likely be scraped.

f)

The organization is likely to save all the "Other" expenses incurred by Dept B if Dept B is closed.

PART B

Fehler Incorporated is forecasting their cash collections from customers for the months of January to March. Use the following details to project the timing of cash inflows from sales:

Projected # of Units Sold: January 225 February 275 March 175

Sales $ per Unit $125

$ of Credit Sales from December to be collected in January $4,000

Historical Sales Trend:

30% of Monthly Sales are Cash

70% of Monthly Sales are on Credit

70% of Credit Sales are Collected in the Month of the Sale 20% of Credit Sales are Collected in the Month after the Sale 10% of Credit Sales are Never Collected (Bad Debts)

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