Problem 13-27 Eliminating a segment LO 13-4

Niklos Boot Co. sells mens, womens, and childrens boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the mens department has a sales staff of nine employees, the manager of the womens department has six employees, and the manager of the childrens department has three employees. All departments are housed in a single store. In recent years, the childrens department has operated at a net loss and is expected to continue to do so. Last years income statements follow.

	Mens Department			Womens Department			Childrens Department
Sales	$	500,000		$	600,000		$	120,000
Cost of goods sold		(210,000	)		(250,000	)		(70,000	)
Gross margin		290,000			350,000			50,000
Department managers salary		(52,000	)		(60,000	)		(24,000	)
Sales commissions		(86,000	)		(98,000	)		(18,000	)
Rent on store lease		(21,000	)		(21,000	)		(21,000	)
Store utilities		(4,000	)		(4,000	)		(4,000	)
Net income (loss)	$	127,000		$	167,000		$	(17,000	)

Required

a-1.	Calculate the contribution to profit of the children's department. (Negative amounts should be indicated by a minus sign.)

a-2.

Should the children's department be eliminated?

	Yes
	No

b-1.	Calculate the net income for the company as the whole with the children's department. (Negative amounts should be indicated by a minus sign.)

b-2.	Prepare the income statement for the company as the whole without the children's department. (Sunk cost of Childrens Department should be allocated equally between the remaining departments.)

c.

Eliminating the childrens department would increase space available to display mens and womens boots. Suppose management estimates that a wider selection of adult boots would increase the stores net earnings by $20,000. Should the children's department be eliminated?

	Yes
	No