Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston Sophistication Corner is a private firm, and hence relies on Variable Costing Net Income for its reporting However, it incurs fixed costs that are shared across its three departments and management allocates fixed costs to its three departments based on direct labor hours Information for the just concluded fiscal year follows Clothing Shoes Accessories TOTAL Sales $850,000 00 $320,000 00 $150,000 00 $1,320,000 00 Less Variable cost $425,000 00 $272,000 00 $82,500 00 $779,500 00 Contribution Margin (CM) $425,000 00 $48,000 00 $67,500 00 $540,500 00 Allocated Fixed Costs $289,000 00 $67,200 00 $39,000 00 $395,200 00 Operating Income (Loss) $136,000 00 $19,200 00 $28,500 00 $145,300 00 Management is considering a major restructuring of its operations Management has noticed that Shoes is incurring a loss and Accessories has the highest operating income as a percentage of sales Accordingly, management is considering a New Plan, key elements of which would include the following Drop Shoes as a product line Devote the space for Shoes as well as additional space that will be newly rented to Accessories The rental cost for the new space will be an additional $16,000 per year Management will be able to reduce its workforce by one senior sales personnel who specialized in Shoes Sophistication pays each of its senior salespersons a salary of $60,000 per year No other changes in sales personnel are expected As a result of its efforts, management expects that the dollar sales of Accessories will double starting the next year One drawback of this plan is that customers that visit the Clothing department of Sophistication often purchase shoes and feel strongly about one stop shopping Consequently, if the Shoes department is closed, even with the expansion of Accessories, Clothing sales are expected to fall by 16 Irrespective of dollar volume of sales after dropping Shoes, contribution margin ratios (CMRs) on Accessories and Clothing are expected to remain the same A What is expected the total dollar contribution margin of the Clothing department under the New Plan Dollar contribution margin (Clothing) under the New Plan B What is the expected total dollar contribution margin of the Accessories department under the New Plan Dollar contribution margin (Accessories) under the New Plan $ C What are Sophistication Corners total fixed costs under the New Plan Fixed Costs under New Plan $ D By how much will Sophistication Corners total Operating Income change under the New Plan relative to last year Change in income $ Income increase or decrease

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 20, 2024

Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Sophistication Corner is a private firm, and hence relies on Variable Costing

Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Sophistication Corner is a private firm, and hence relies on Variable Costing Net Income for its reporting. However, it incurs fixed costs that are shared across its three departments and management allocates fixed costs to its three departments based on direct labor hours. Information for the just-concluded fiscal year follows.

	Clothing	Shoes	Accessories	TOTAL
Sales	$850,000.00	$320,000.00	$150,000.00	$1,320,000.00
Less: Variable cost	$425,000.00	$272,000.00	$82,500.00	$779,500.00
Contribution Margin (CM)	$425,000.00	$48,000.00	$67,500.00	$540,500.00
Allocated Fixed Costs	$289,000.00	$67,200.00	$39,000.00	$395,200.00
Operating Income / (Loss)	$136,000.00	-$19,200.00	$28,500.00	$145,300.00

Management is considering a major restructuring of its operations. Management has noticed that Shoes is incurring a loss and Accessories has the highest operating income as a percentage of sales. Accordingly, management is considering a New Plan, key elements of which would include the following:

Drop Shoes as a product line.
Devote the space for Shoes as well as additional space that will be newly rented to

Accessories.
The rental cost for the new space will be an additional $16,000 per year.
Management will be able to reduce its workforce by one senior sales personnel who

specialized in Shoes. Sophistication pays each of its senior salespersons a salary of $60,000

per year. No other changes in sales personnel are expected.
As a result of its efforts, management expects that the dollar sales of Accessories will double

starting the next year.
One drawback of this plan is that customers that visit the Clothing department of

Sophistication often purchase shoes and feel strongly about "one-stop shopping". Consequently, if the Shoes department is closed, even with the expansion of Accessories, Clothing sales are expected to fall by 16%.
Irrespective of dollar volume of sales after dropping Shoes, contribution margin ratios (CMRs) on Accessories and Clothing are expected to remain the same.