Problem 6-28B Eliminating a segment

Pams Grocery Store has three departmentsmeat, canned food, and produceeach of which has its own manager. All departments are housed in a single store. Recently, the produce department has been suffering a net loss and is expected to continue doing so. Last years income statements follow:

	Meat Department	Canned Food Department	Produce Department
Sales	$ 350,000	$ 320,000	$ 237,500
Cost of goods sold	(160,000)	(190,000)	(147,500)
Gross margin	190,000	130,000	90,000
Departmental managers salary	(21,000)	(15,000)	(17,500)
Rent on store lease	(40,000)	(40,000)	(40,000)
Store utilities	(10,000)	(10,000)	(10,000)
Other general expenses	(49,000)	(49,000)	(49,000)
Net income (loss)	$ 70,000	$ 16,000	$ (26,500)

Required

Determine whether to eliminate the produce department.

Confirm the conclusion you reached in Requirement a by preparing a before and an after income statement, assuming that the produce department is eliminated.

Eliminating the produce department would allow the meat department to expand. It could add seafood to its products. Suppose that management estimates that offering seafood would increase the stores net earnings by $80,000. Would this information affect the decision that you made in Requirement a? Explain your answer.