Question

Zara Company is thinking of dropping shoes product line because it is reporting an operating loss. Assuming fixed costs are avoidable, if Zara Company drops shoes and does not replace it, what effect will this have on profits? What will be the overall profit of the organisation? Show calculations and provide your justification.

	Shits	Pants	Shoes
Sales	80 000	58 000	36 000
Variable costs	36 000	38 000	22 000
Contribution margin	44 000	20 000	14 000
Fixed expenses	12 000	15 000	16 000
Profit (loss)	32 000	5 000	(2 000)

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.