Fabric Wholesalers Ltd operates three departments. The accessories department has not been performing very well and has
Question:
Fabric Wholesalers Ltd operates three departments. The accessories department has not been performing very well and has shown a loss for the past 3 years according to the company’s income statement. Competition in the accessories line is strong and the margins are low. The departmental income statement for the year ended 30 June 2017 was as follows:
Fabric wholesalers LTD Income Statement for the year ended 30 June 2017 | ||||||||||||||
Accessories department | Other two departments | |||||||||||||
INCOME Sales Less: Cost of sales | $488 000 366 000 | $1 500 200 671 200 | ||||||||||||
GROSS PROFIT Direct expenses Indirect expenses | 122 000 (56 900) (78 600) | 829 000 (235 500) (198 200) | ||||||||||||
PROFIT (LOSS) | $ (13 500) | $ 395 300 | ||||||||||||
Indirect expenses of $53 000 are avoidable if the accessories department is eliminated.
Required
A. Calculate the departmental margin for accessories department.
B. Should the accessories department be closed down? Justify your answer.
C. Prepare an income statement for the two remaining departments, assuming the Accessories Department is dropped, to confirm your results in requirement B.
Step by Step Answer:
Accounting
ISBN: 978-1118608227
9th edition
Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett