V6-B3 Dropping a Product Line Hamleys Toy Store is on Regent Street in London. It has a magic department near the main door. Suppose that management is considering dropping the magic department, which has consistently shown an operating loss. The predicted income statements, in thousands of pounds (), are (for ease of analysis, only three product lines are shown): Sales Variable expenses Contribution margin Fixed expenses CHAPTER 6 RELEVANT INFORMATION FOR DECISION MAKING WITH A FOCUS ON OPERATIONAL DECISIONS (compensation. depreciation, property taxes, insurance, etc.) Operating income (loss) Total 6,000 4,090 1,910 (32%) 1,100 810 General Merchandise 5,000 3.500 1,500 (30%) 750 750 Electronic Products 400 200 200 (50%) 50 150 The 300,000 of magic department fixed expenses include the compensation of employees of 120,000. These employees will be released if the magic department is abandoned. All of the magic department's equipment is fully depreciated, so none of the 300,000 pertains to such items. Furthermore, disposal values of equipment will be exactly offset by the costs of removal and remodeling. If the magic department is dropped, the manager will use the vacated space for either more general merchandise or more electronic products. The expansion of general merchandise would not entail hiring any additional salaried help, but more electronic products would require an addi- tional person at an annual cost of 30,000. The manager thinks that sales of general merchan- dise would increase by 250,000, and electronic products by 200,000. The manager's modest predictions are partially based on the fact that she thinks the magic department has helped lure customers to the store and, thus, improved overall sales. If the magic department is closed, that lure would be gone. Should the magic department be closed? Explain, showing computations. Magic Department 600 390 210 (35%) 300 (90) 267