Our client, ABC Company, is a merchandiser of items needed by children ages 3 to 10. It sells clothing, toys, books, and media which includes DVDs and CDs. ABC brought to us its budget for last year and its actual results for last year in total dollars for each department, total dollars for the company, and the selling price and cost per unit sold by department. It also provided us with the following information.

• The selling, G & A, depreciation, and interest expense are fixed costs. If a department is closed, the selling, depreciation, and interest expense would have to be allocated to the remaining departments. The G & A for that department would no longer be needed.
• The company, as a whole, exceeded its budget, but ABC is concerned about the Books and Media departments as neither met the budget regarding net income. Toys did very well due to the closing of a major toy store. Clothing also did well as children out grow their clothes, wear them out, and styles and seasons change.
• The book department was located at the very back of the store, and perhaps, that is why so few books sold. Could there be other reasons?
• The media department did not do as well as expected either. It is located next to the books but is larger and more visible.
• ABC wants to know if it should close both Books and Media, only close one, or leave them both open. What strategy do you suggest?
• Is there another department that ABC should consider opening to bring more traffic into the store?
• If the decision is to keep them open, how many books and media need to be sold before realizing a profit. It would be good to know these numbers for clothing and toys also to provide an incentive to sales personnel.

The following data were provided by our client.

   

 

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ABC Company Department Information For the Prior Year Total Clothing Budget Вooks Media Total Toys Budget Budget $2,000,000 $2,100,000 $3,000,000 $3,500,000 $200,000 $ 50,000 $700,000 40,000 280,000 Actual Budget 660,000 $5,900,000 $6,310,000 2,300,000 2430,000 Actual Budget Actual Actual Actual Net Sales Cost of Good Sold 900, 600 980,000 120,e 1,000,000 $1,000,000 $1,200,000 $2,100,000 $2,520,000 $ 80,000 $ 10,000 $420,000 $150,000 $3,600,000 $3,830,000 900,000 510,000 Gross Margin Operating expenses (50,000) (10,000) (5,000) (17,500) (17,500) (147,500) (40,000) Selling, G& A (50,000) (75,000) (75,000) (5,000) (147,500) (10,000) (10,00e) (10,000) (10,000) (10,000)| $ 940,000 $1,140,000 $2,015,000 $2,435,000 $ 65,000 $ (5,000) $392,500 $122,500 $3412,500 $3,692,500 (5,000) Depreciation (10,000) (10,000) (40,000) Operating income (20,000) Income before inCome taxes $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $(10,000) $387,500 $117,500 $3,392,500 $3,672,500 (887,950) Interest expense (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (20,000) Provision for income taxes (746,350) $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $t10,000) $387,500 $117,500 $2,646,150 $2,864,550 Net income Clothing Toys Books Media Budget Actual Actual Actual Budget 21 $ 50 $ Actual Budget 50 $ Budget 5 $ Selling price per Unit $ 20 $ 10 $ 25 22 Cost per Unit 10 15 12 6 4 10 17 Gross Margin per Unit 10 $ 12 $ 35 $ 38 $ 4$ 1 $ 15 $ 5 %24 ABC Company Department Information For the Prior Year Total Clothing Budget Вooks Media Total Toys Budget Budget $2,000,000 $2,100,000 $3,000,000 $3,500,000 $200,000 $ 50,000 $700,000 40,000 280,000 Actual Budget 660,000 $5,900,000 $6,310,000 2,300,000 2430,000 Actual Budget Actual Actual Actual Net Sales Cost of Good Sold 900, 600 980,000 120,e 1,000,000 $1,000,000 $1,200,000 $2,100,000 $2,520,000 $ 80,000 $ 10,000 $420,000 $150,000 $3,600,000 $3,830,000 900,000 510,000 Gross Margin Operating expenses (50,000) (10,000) (5,000) (17,500) (17,500) (147,500) (40,000) Selling, G& A (50,000) (75,000) (75,000) (5,000) (147,500) (10,000) (10,00e) (10,000) (10,000) (10,000)| $ 940,000 $1,140,000 $2,015,000 $2,435,000 $ 65,000 $ (5,000) $392,500 $122,500 $3412,500 $3,692,500 (5,000) Depreciation (10,000) (10,000) (40,000) Operating income (20,000) Income before inCome taxes $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $(10,000) $387,500 $117,500 $3,392,500 $3,672,500 (887,950) Interest expense (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (20,000) Provision for income taxes (746,350) $ 935,000 $1,135,000 $2,010,000 $2,430,000 $ 60,000 $t10,000) $387,500 $117,500 $2,646,150 $2,864,550 Net income Clothing Toys Books Media Budget Actual Actual Actual Budget 21 $ 50 $ Actual Budget 50 $ Budget 5 $ Selling price per Unit $ 20 $ 10 $ 25 22 Cost per Unit 10 15 12 6 4 10 17 Gross Margin per Unit 10 $ 12 $ 35 $ 38 $ 4$ 1 $ 15 $ 5 %24

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Book store is at the end of the store thats the rea... View the full answer