Second Time Around sells clothing, shoes, and accessories at a suburban location near Dallas. Information for the just concluded calendar year follows.?ClothingShoesAccessoriesSales$850,000$320,000$150,000Less: Variable costs$510,000$270,000$82,500 Fixed costs290,00070,00042,000 Total costs$800,000$340,000$124,500Operating income (loss)$50,000$(20,000)$25,500Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Second Time Around will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by

Question

$70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.Required:Determine whether the shoe department should be closed.

What will be an ideal response?

Answer 1

The company is currently earning $55,500 ($50,000 - $20,000 + $25,500). If the shoe department is closed, total income amounts to only $8,000 as shown below, meaning the department should remain in operation.
Sales:
Clothing: $850,000 - ($850,000 × 15%) = $722,500
Accessories: $150,000 + $70,000 = $220,000
Total sales: $722,500 + $220,000 = $942,500
Variable costs:
Clothing: $510,000 ÷ $850,000 = 60%; $722,500 × 60% = $433,500
Accessories: $82,500 + [$70,000 × (1 - 35%)] = $128,000
Total variable costs: $433,500 + $128,000 = $561,500
Fixed and remodeling costs:
$290,000 + ($70,000 - $45,000) + $42,000 + $16,000 = $373,000
Operating income: $942,500 - $561,500 - $373,000 = $8,000