Finch Boot Co. sells men’s, women’s, and children’s boots. Foreach type of boot sold, it operates a separate department that hasits own manager. The manager of the men’s department has a salesstaff of nine employees, the manager of the women’s department hassix employees, and the manager of the children’s department hasthree employees. All departments are housed in a single store. Inrecent years, the children’s department has operated at a net lossand is expected to continue to do so. Last year’s income statementsfollow:
| Men’s Department | | Women’s Department | | Children’s Department |
| Sales | $ | 660,000 | | | $ | 480,000 | | | $ | 170,000 | |
| Cost of goods sold | | (268,500 | ) | | | (178,800 | ) | | | (99,875 | ) |
| Gross margin | | 391,500 | | | | 301,200 | | | | 70,125 | |
| Department manager’s salary | | (58,000 | ) | | | (47,000 | ) | | | (27,000 | ) |
| Sales commissions | | (112,200 | ) | | | (81,600 | ) | | | (30,900 | ) |
| Rent on store lease | | (27,000 | ) | | | (27,000 | ) | | | (27,000 | ) |
| Store utilities | | (10,000 | ) | | | (10,000 | ) | | | (10,000 | ) |
| Net income (loss) | $ | 184,300 | | | $ | 135,600 | | | $ | (24,775 | ) |
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Required
a. Calculate the contribution margin. Determinewhether to eliminate the children’s department.
b-1. Calculate the net income for the companyas a whole with the children's department.
b-2. Confirm the conclusion you reached inRequirement a by preparing income statements for thecompany without the children’s department.
c. Eliminating the children’s department wouldincrease space available to display men’s and women’s boots.Suppose management estimates that a wider selection of adult bootswould increase the store’s net earnings by $38,000. Would thisinformation affect the decision that you made in Requirementa?
