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Hamleys Toy Store is on Regent St in London. It has a magic department near the main door. Suppose that management is considering dropping the magic departmetn, which has consistently shown and operating loss. The predicted income statement, in thousands of pounds, are shown below (for ease of analysis, only 3 product lines are shown) Total General Merchandise Electronic Products Magic Department Sales 6,000 5,000 400 600 Variable expenses E 4,090 3,500 200 E 390 Contribution margin 1,910 (329) 1,500 (30%) 200 (50%) 210 (35%) . Fixed expenses o compensation, depreciation etc f 1,100 750 E 50 300 1 Operating income (loss) 810 E 750 150 - 90 2 The 300,000 of magic department fixed expenses include the compensation of employees of 120,000. These employoes will be 9 released it the magic department is abandoned. All of the magie departmont's equipment is fully depreciated, so none of tho 4 300,000 pertains to such items. Furthermore, disposal values of equipment will be exactly offset by the costs of removal and S remodeling, If the magic department is dropped, the manager will use the vacated space for either more general morchandise or moro electronic 17. products. The expansion of general merchandise would not entail hiring any additional salariod help, but more electronic products 18 would require an additional person at an annual cost of 30,000. The manager thinks that sales of general morchandise would increase by 250,000, electronic products by 200,000. The manager's modest predictions are partially based on the fact that sho thinks the magic department has helped lure customers to the store and, thus, improved overall sales. If the magic department is closed, that lure would be gono. 21 22 Requirements 23 1. Should the magic department be closed? Explain showing computations 24 Let's begin by analyzing the option of dropping the magic dep. and expanding the general mechandise department 25 Then analyze the option of dropping the magic dep. And expanding the electronics dep. 26 Enter all amounts in thousands, Round the answer to the nearest thousands, 16 20 2 Requirements 3. 1. Should the magic department be closed? Explain showing computations Let's begin by analyzing the option of dropping the magic dep, and expanding the general mechandise department 5 Then analyze the option of dropping the magic dep. And expanding the electronics dep. 6 Enter all amounts in thousands, Round the answer to the nearest thousands 7 Total - before change Drop Magic Dept Expand General Comp Totals if Mech Magic Dept is dropped and Gen 8 is expanded A B - o Sales 6,000 ? Variable expenses 4,090 ? ? Contribution margin 1,910 ? ? ? 3 Fixed expenses E 1,100 ? Operating income (loss) 810 ? la noc th

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