Question
Solomon Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager.
Solomon Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager. 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 | $ | 700,000 | $ | 500,000 | $ | 200,000 | |||||
Cost of goods sold | (272,500 | ) | (182,000 | ) | (103,875 | ) | |||||
Gross margin | 427,500 | 318,000 | 96,125 | ||||||||
Department managers salary | (66,000 | ) | (55,000 | ) | (35,000 | ) | |||||
Sales commissions | (120,200 | ) | (89,600 | ) | (34,900 | ) | |||||
Rent on store lease | (35,000 | ) | (35,000 | ) | (35,000 | ) | |||||
Store utilities | (18,000 | ) | (18,000 | ) | (18,000 | ) | |||||
Net income (loss) | $ | 188,300 | $ | 120,400 | $ | (26,775 | ) | ||||
Required
a. Calculate the contribution to profit. Determine whether to eliminate the childrens department.
b-1. Calculate the net income for the company as a whole with the children's department.
b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company without the childrens department.
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 $46,000. Would this information affect the decision that you made in Requirement a?
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