Question

Thornton Boot Co. sells men’s, women’s, and children’s boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men’s department has a sales staff of nine employees, the manager of the women’s department has six employees, and the manager of the children’s department has three employees. All departments are housed in a single store. In recent years, the children’s department has operated at a net loss and is expected to continue to do so. Last year’s income statements follow.

	Men’s Department				Women’s Department				Children’s 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 manager’s 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 children’s 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 children’s department.

4. c. Eliminating the children’s department would increase space available to display men’s and women’s boots. Suppose management estimates that a wider selection of adult boots would increase the store’s net earnings by $48,000. Would this information affect the decision that you made in Requirement a?

Answer 1

Contribution Margin - Sales - Variable costs
=Sales - cost of goods sold - department manager's salary - sales commission
=	22,225
No, since positive contribution margin
b-1
Net Income as a whole = 179300+111600-34,775 = $256,125
b-2
	Men	Women	Company
Sales	700,000	500,000	1,200,000
COGS	-273,500	-182,800	-456,300
Gross Margin	426,500	317,200	743,700
Salary	-68,000	-57,000	-125,000
Sales Commission	-122,200	-91,600	-213,800
Rent	-55,500	-55,500	-111,000
Utilities	-30,000	-30,000	-60,000
Net Income	150,800	83,100	233,900
Since fixed costs of rent and utilities will not be reduced, they are allocated to remaining divisions
Yes, better to discontinue as additional earnings are higher than lost contribution margin