Question

2. Fancy Footwear is a shoe store that has three departments: men’s, women’s and children’s. Sales and variable costs for each department are shown below. In addition, each department has its own fixed costs for staffing and takes a one-third (1/3) share of rental and management costs for the clothing store as a whole (as shown in the table below).

	Men’s	Women’s	Children’s
Sales	$154,000	$276,000	$147,000
Variable costs as a percentage of department sales	47%	52%	48%
Departmental fixed costs	$65,000	$60,000	$30,000
Department’s portion of shared fixed costs	$30,000	$30,000	$30,000

1. Calculate the profitability of Fancy Footwear’s three departments.

2. Management is considering shutting down one or more of Fancy Footwear’s departments, and would like your advice. What recommendations can you provide management?

Answer 1

1)		Men’s	Women’s	Children’s
	Sales	$154,000	$276,000	$147,000
	Less: Variable Cost	$72,380	$143,520	$70,560
	Contribution margin	$81,620	$132,480	$76,440
	Less: Departmental fixed costs	$65,000	$60,000	$30,000
	Segment margin	$16,620	$72,480	$46,440
	Department’s portion of shared fixed costs	$30,000	$30,000	$30,000
	Net Operating income	($13,380)	$42,480	$16,440
2)	It is advisable to not the shut down any of the department because segment margin of each department is positive or we can say each department is earning profit. However sharing of fixed cost should be done on sales revenue basis of department instead of equal distribution.