Gibson 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. 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 $ 660,000 $ 480,000 $ 200,000 Cost of goods sold (269,500 ) (179,600 ) (100,875 ) Gross margin 390,500 300,400 99,125 Department manager’s salary (60,000 ) (49,000 ) (29,000 ) Sales commissions (114,200 ) (83,600 ) (31,900 ) Rent on store lease (29,000 ) (29,000 ) (29,000 ) Store utilities (12,000 ) (12,000 ) (12,000 ) Net income (loss) $ 175,300 $ 126,800 $ (2,775
Gibson 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. 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 | $ | 660,000 | $ | 480,000 | $ | 200,000 | |||||
| Cost of goods sold | (269,500 | ) | (179,600 | ) | (100,875 | ) | |||||
| Gross margin | 390,500 | 300,400 | 99,125 | ||||||||
| Department manager’s salary | (60,000 | ) | (49,000 | ) | (29,000 | ) | |||||
| Sales commissions | (114,200 | ) | (83,600 | ) | (31,900 | ) | |||||
| Rent on store lease | (29,000 | ) | (29,000 | ) | (29,000 | ) | |||||
| Store utilities | (12,000 | ) | (12,000 | ) | (12,000 | ) | |||||
| Net income (loss) | $ | 175,300 | $ | 126,800 | $ | (2,775 | ) | ||||
Required
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a. Calculate the contribution to profit. Determine whether to eliminate the children’s department.
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b-1. Calculate the net income for the company as a whole with the children's department.
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b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company without the children’s department.
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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 $40,000. Would this information affect the decision that you made in Requirement a?
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