Question

Problem 13-26 Eliminating a segment LO 13-4

Jordan 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	$670,000	$490,000	$190,000
Cost of goods sold	(270,000)	(180,000)	(101,375)
Gross Margin	400,000	310,000	88,625
Department manager's salary	(61,000)	(50,000)	(30,000)
Sales commissions	(115,200)	(84,600)	(32,400)
Rent on store lease	(30,000)	(30,000)	(30,000)
Store utilities	(13,000)	(13,000)	(13,000)
Net income (loss)	$180,000	$132,400	$(16,775)

Required

1. a. Calculate the contribution margin. 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 $41,000. Would this information affect the decision that you made in Requirement a?

Complete this question by entering your answers in the tabs below.

• Required A

Calculate the contribution margin. Determine whether to eliminate the children’s department. (Negative amounts should be indicated by a minus sign.)

Contribution to profit (loss)
Should the children's department be eliminated?	Yes or No

• Required B1

Calculate the net income for the company as a whole with the children's department.

Net income (loss)

• Required B2

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.

	Men's Department	Women's Department	Company Total
Sales
Cost of goods sold
Gross margin
Department manager's salary
Sales commissions
Rent on store lease
Store utilities
Net income (loss)

• Required 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 $41,000. Would this information affect the decision that you made in Requirement a?

Will the decision made in Requirement A be affected?

Yes or No

Answer 1