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Thornton Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager.

Thornton 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 $ 700,000 $ 500,000 $ 200,000
Cost of goods sold (273,500 ) (182,800 ) (104,875 )
Gross margin 426,500 317,200 95,125
Department managers salary (68,000 ) (57,000 ) (37,000 )
Sales commissions (122,200 ) (91,600 ) (35,900 )
Rent on store lease (37,000 ) (37,000 ) (37,000 )
Store utilities (20,000 ) (20,000 ) (20,000 )
Net income (loss) $ 179,300 $ 111,600 $ (34,775 )

Required

  1. a. Calculate the contribution to profit. Determine whether to eliminate the childrens department.

  2. b-1. Calculate the net income for the company as a whole with the children's department.

  3. b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company as a whole with and without the childrens department.

  4. 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 $48,000. Would this information affect the decision that you made in Requirement a?

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