Campbell Boot Co. sells men’s, women’s, and children’s boots.For each type of boot sold, it operates a separate department thathas its own manager. The manager of the men’s department has asales staff of nine employees, the manager of the women’sdepartment has six employees, and the manager of the children’sdepartment has three employees. All departments are housed in asingle store. In recent years, the children’s department hasoperated at a net loss and is expected to continue to do so. Lastyear’s income statements follow:
| Men’s Department | | Women’s Department | | Children’s Department |
| Sales | $ | 640,000 | | | $ | 460,000 | | | $ | 180,000 | |
| Cost of goods sold | | (267,500 | ) | | | (178,000 | ) | | | (98,875 | ) |
| Gross margin | | 372,500 | | | | 282,000 | | | | 81,125 | |
| Department manager’s salary | | (56,000 | ) | | | (45,000 | ) | | | (25,000 | ) |
| Sales commissions | | (110,200 | ) | | | (79,600 | ) | | | (29,900 | ) |
| Rent on store lease | | (25,000 | ) | | | (25,000 | ) | | | (25,000 | ) |
| Store utilities | | (8,000 | ) | | | (8,000 | ) | | | (8,000 | ) |
| Net income (loss) | $ | 173,300 | | | $ | 124,400 | | | $ | (6,775 | ) |
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Required
a. Calculate the contribution margin. Determinewhether to eliminate the children’s department.
b-1. Calculate the net income for the companyas a whole with the children's department.
b-2. Confirm the conclusion you reached inRequirement a by preparing income statements for thecompany as a whole with and without the children’s department.
c. Eliminating the children’s department wouldincrease space available to display men’s and women’s boots.Suppose management estimates that a wider selection of adult bootswould increase the store’s net earnings by $36,000. Would thisinformation affect the decision that you made in Requirementa?
