In considering Goodsports Ltd (in Example 7.3), we saw that the general clothes department should not be closed ‘without any other developments’.

What ‘other developments’ could affect this decision, making continuation either more attractive or less attractive?

Data from Example 7.3

Goodsports Ltd is a retail shop that operates through three departments, all in the same premises. The three departments occupy roughly equal-sized areas of the premises. The projected trading results for next year are:

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Sales revenue Cost Profit/(loss) Total £000 Sales revenue Variable cost Contribution Fixed cost (rent and so on) Profit/(loss) 534 (482) 52 It would appear that if the general clothes department were to close, the business would be more profitable, by £9,000 a year. When the cost is analysed between that part that is variable and that part that is fixed, however, the contribution of each department can be deduced and the following results obtained: Total £000 534 (344) 190 Sports equipment £000 254 (213) 41 (138) 52 Sports clothes General clothes £000 £000 183 97 (163) (106) 20 Sports equipment Sports clothes General clothes £000 £000 254 183 (167) (117) 87 66 (46) 41 (46) 20 £000 97 (60) 37 (46) Now it is clear that closing the general clothes department, without any other developments, would make the business worse off by £37,000 (the department's contribution). The department should not be closed, because it makes a positive contribution. The fixed cost would continue whether the department was closed or not. As can be seen from the above analysis, distinguishing between variable and fixed cost, and deducing the contribution, can make the picture much clearer.