Question
Zachary Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager.
Zachary 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 | $ | 690,000 | $ | 490,000 | $ | 230,000 | |||||
Cost of goods sold | (275,000 | ) | (184,000 | ) | (106,375 | ) | |||||
Gross margin | 415,000 | 306,000 | 123,625 | ||||||||
Department managers salary | (71,000 | ) | (60,000 | ) | (40,000 | ) | |||||
Sales commissions | (125,200 | ) | (94,600 | ) | (37,400 | ) | |||||
Rent on store lease | (40,000 | ) | (40,000 | ) | (40,000 | ) | |||||
Store utilities | (23,000 | ) | (23,000 | ) | (23,000 | ) | |||||
Net income (loss) | $ | 155,800 | $ | 88,400 | $ | (16,775 | ) | ||||
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 $51,000. Would this information affect the decision that you made in Requirement a?
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