Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Information for the just concluded calendar year follows.
|
Clothing |
Shoes |
Accessories |
|
|
Sales |
$ 850,000 |
$ 320,000 |
$ 150,000 |
|
Less: Variable Costs |
$ 510,000 |
$ 270,000 |
$ 82,500 |
|
Fixed Costs |
290,000 |
70,000 |
42,000 |
|
Total Costs |
$ 800,000 |
$ 340,000 |
$ 124,500 |
|
Operating income (loss) |
$ 50,000 |
$ (20,000) |
$ 25,500 |
Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophistication Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about “one stop shopping,” clothing sales are expected to fall by 15% if the shoe department is closed.
Required:
Determine whether the shoe department should be closed.