Problem 6-28A (Algo) Eliminating a segment LO 6-4

Jordan 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	$	670,000			$	490,000			$	190,000
Cost of goods sold		(270,000	)			(180,000	)			(101,375	)
Gross margin		400,000				310,000				88,625
Department managers salary		(61,000	)			(50,000	)			(30,000	)
Sales commissions		(115,200	)			(84,600	)			(32,400	)
Rent on store lease		(30,000	)			(30,000	)			(30,000	)
Store utilities		(13,000	)			(13,000	)			(13,000	)
Net income (loss)	$	180,800			$	132,400			$	(16,775	)

Required

a. Calculate the contribution to profit. Determine whether to eliminate the childrens department.

b-1. Calculate the net income for the company as a whole with the children's department.

b-2. Confirm the conclusion you reached in Requirement a by preparing income statements for the company as a whole with and without the childrens department.

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 $41,000. Would this information affect the decision that you made in Requirement a?