Deela Fashion in New York operates three departments: Men's, Women's, and Accessories.  

Deela Fashion allocates all fixed expenses (unavoidable building depreciation and utilities) based on each department's square footage. If the company discontinues one of the current departments, it plans to replace the discontinued department with a Shoe Department. The company expects the Shoe Department to produce $79,000

in sales and have $45,000 of variable costs. Because the shoe business would be new to Deela Fashion, the company would have to incur an additional $7,300

of fixed costs (advertising, new shoe display racks, and other fixed costs) per quarter related to the department.

 

Departmental operating income data for the third quarter of the current year are as follows:

 

Deela Fashions
Product Line Contribution Margin Income Statement
For the Year
		Product lines
		Men's	Women's	Accessories	Company Total
	Sales revenue	$114,000	$54,000	$97,000	$265,000
	Less: Variable expenses	62,000	23,000	88,000	173,000
	Contribution margin	$52,000	$31,000	$9,000	$92,000
	Less: Fixed expenses	29,000	18,000	24,000	71,000
	Operating income	$23,000	$13,000	$(15,000)	$21,000

 

WHAT SHOULD A COMPANY DO NOW?

First, calculate the relevant operating income from the Shoe Department.

  

Deela Fashion
Operating Income—Shoe Department
	Expected revenues
	Expected expenses:
	Variable expenses
	Fixed expenses
	Total expected expenses
	Expected relevant operating income

Next, let's calculate the contribution margin of the Shoe Department.

Deela Fashion
Product Line Contribution Margin Income Statement
For the Year
		Product lines
		Men's	Women's	Accessories	Shoes
	Sales revenue	$114,000	$54,000	$97,000
	Less variable expenses	62,000	23,000	88,000
	Contribution margin	52,000	31,000	9,000

Under these circumstances, should

DeelaDeela

Fashion drop any of the departments and replace it with a Shoe Department?

The company should

▼

 

consider replacing the Accessories Department with a shoe department

consider replacing the Men's Department with a shoe department

consider replacing the Women's Department with a shoe department

not consider replacing any department with a shoe department

because  

the Shoe Department has a higher contribution margin than the Accessories department but will incur higher fixed costs.

the fixed cost savings would exceed the contribution margin lost from dropping this department.

the Shoe Department has a higher contribution margin than the Accessories department and thus is the better investment.

Answer rating: 100% (QA)

Deela Fashion Expected operating income from shoe department Amount Sales revenue 7900000 Less Variable expenses 4500000 Contribution margin 3400000 L... View the full answer