Question
Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows. Clothing Shoes Accessories Sales
Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows.
| Clothing | Shoes | Accessories |
Sales | $850,000 | $320,000 | $150,000 |
Varable Costs | $510,000 | $270,000 | $82,500 |
Fixed Costs | $290,000 | $70,000 | $42,000 |
Operating Income (Loss) | $50,000 | ($20,000) | $25,500 |
Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophisticates' Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed. Determine whether the shoe department should be closed by computing how much income will increase or decrease if the department is eliminated.
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