Question

The ABC department store has three major product lines: hardware, clothing, and sporting goods. The store is considering dropping the clothing line because the income statement shows that it is operating at a loss. Note the income statement for these product lines below:

	Hardware	Clothing	Sporting Goods	Total
Sales	$10,000	$15,000	$25,000	$50,000
Less: Variable costs	$6,000	$8,000	$12,000	$26,000
Contribution Margin	$4,000	$7,000	$13,000	$24,000
Less: Fixed costs
Direct	$2,000	$6,500	$4,000	12,500
Allocated	$1,000	$1,500	$2,500	$5,000
Total fixed costs	$3,000	$8,000	$6,500	$17,500
Net Income	$1,000	($1,000)	$6,500	$6,500

Should the store drop the clothing line of business? Explain using the sales and cost data above. Please share the working.

Answer 1