Question
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
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a. Calculate the contribution to profit. Determine whether to eliminate the childrens department.
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b-1. Calculate the net income for the company as a whole with the children's department.
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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.
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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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