Holiday Gifts has three sales departments: dishes, clothing, and paper products. The store€™s condensed income statement for the year ended December 31, 2019, is shown below:

The proprietor asked the auditor if the Clothing and/or Paper Products departments should be closed. In the opinion of both the owner and the auditor, if the Clothing department is closed, the total indirect expenses could possibly be reduced to $17,000. If only the Paper Products department is closed, the indirect expenses could possibly be reduced to a total of $25,000. In the opinion of the owner, if the Paper Products department is closed, a loss of $10,000 in sales could be lost by the Dishes department. This loss in sales would reduce the Dishes Cost of Goods Sold by $4,000. She also thinks that closing the Paper Products department would have no effect on sales of the Clothing department.

INSTRUCTIONS
1. Based on the preceding information, what would the estimated total profit or loss be if the Paper Goods department were closed?
2. What would the estimated total profit or loss be if the Clothing department were closed?
3. What advice would you give the proprietor?
Analyze: What is the current contribution margin for each department?

Transcribed Image Text:

Hollday Glfts Condensed Income Statement Year Ended December 31, 2019 Paper Products Dishes Clothing 100000 50000 |200000 80000 120000 Sales Cost of Goods Sold Gross Profit 22000 28000 45000 55000 Operating Expenses Direct Expenses Indirect Expenses Total Operating Expenses Net Income 10000 35000 15000 50000 15000 9000 2 4000 4000 14000 14000 3 1000 이이이이4