Eliminating a segment
Levene Boot Co. sells men’s, women’s, and children’s boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men’s department has a sales staff of nine employees, the manager of the women’s department has six employees, and the manager of the children’s department has three employees. All departments are housed in a single store. In recent years, the children’s department has operated at a net loss and is expected to continue doing so. Last year’s income statements follow.
|
Men’s |
Women’s |
Children’s |
|
|
Department |
Department |
Department |
|
|
Sales |
$590,000 |
$420,000 |
$155,000 |
|
Cost of goods sold |
(265,500) |
(176,400) |
(96,875) |
|
Gross margin Department |
324,500 |
243,600 |
58,125 |
|
manager’s salary Sales |
(52,000) |
(41,000) |
(21,000) |
|
commissions Rent on |
(106,200) |
(75,600) |
(27,900) |
|
store lease |
(21,000) |
(21,000) |
(21,000) |
|
Store utilities |
(4,000) |
(4,000) |
(4,000) |
|
Net income (loss) |
$141,300 |
$102,000 |
$ (15,775) |
Required
a. Determine whether to eliminate the children’s department.
b. Confirm the conclusion you reached in Requirement a by preparing income statements for the company as a whole with and without the children’s department.
c. Eliminating the children’s department would increase space available to display men’s and women’s boots. Suppose management estimates that a wider selection of adult boots would increase the store’s net earnings by $32,000. Would this information affect the decision that you made in Requirement a? Explain your answer.