Question
Problem 13-27 Eliminating a segment LO 13-4 Niklos Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a
Problem 13-27 Eliminating a segment LO 13-4
Niklos Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the mens department has a sales staff of nine employees, the manager of the womens department has six employees, and the manager of the childrens department has three employees. All departments are housed in a single store. In recent years, the childrens department has operated at a net loss and is expected to continue to do so. Last years income statements follow. |
Mens Department | Womens Department | Childrens Department | |||||||
Sales | $ | 500,000 | $ | 600,000 | $ | 120,000 | |||
Cost of goods sold | (210,000 | ) | (250,000 | ) | (70,000 | ) | |||
Gross margin | 290,000 | 350,000 | 50,000 | ||||||
Department managers salary | (52,000 | ) | (60,000 | ) | (24,000 | ) | |||
Sales commissions | (86,000 | ) | (98,000 | ) | (18,000 | ) | |||
Rent on store lease | (21,000 | ) | (21,000 | ) | (21,000 | ) | |||
Store utilities | (4,000 | ) | (4,000 | ) | (4,000 | ) | |||
Net income (loss) | $ | 127,000 | $ | 167,000 | $ | (17,000 | ) | ||
Required |
a-1. | Calculate the contribution to profit of the children's department. (Negative amounts should be indicated by a minus sign.) |
a-2. | Should the children's department be eliminated? | ||||
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b-1. | Calculate the net income for the company as the whole with the children's department. (Negative amounts should be indicated by a minus sign.) |
b-2. | Prepare the income statement for the company as the whole without the children's department. (Sunk cost of Childrens Department should be allocated equally between the remaining departments.) |
c. | Eliminating the childrens department would increase space available to display mens and womens boots. Suppose management estimates that a wider selection of adult boots would increase the stores net earnings by $20,000. Should the children's department be eliminated? | ||||
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