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Total Company Before Drop Magic Dept Expand G.M. Company if Total if Magic dropped and G. M

Sales E 6,670 E 5,600 E 410 E 660

Variable Expense 4,397 3,752 209 436

Contribution E 2273 (34%) E 1,848 (33%) E 201 (49%) E 224 (34%)

Fox Expense (Compensation,

Deprecation, Property Taxes,

Insurance) 1403 1038 46 319

Op Income (loss) E 870 E 810 E 155 E 95

The 319,000 of magic department fixed expenses include the compensation of employees of 100,000. These employees will be released if the magic department is abandoned. All of the magic department's equipment is fully depreciated, so none of the 319,000 pertains to such items. Furthermore, disposal values of equipment will be exactly offset by the costs of removal and remodeling.

If the magic department is dropped, the manager will use the vacated space for either more general merchandise or more electronic products. The expansion of general merchandise would not entail hiring any additional salaried help, but more electronic products would require an additional person at an annual cost of 40,000.

The manager thinks that sales of general merchandise would increase by 230,000; electronic products, by 185,000.

The manager's modest predictions are partially based on the fact that she 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 gone.

Big Kids Toy

Store is on Regent Street in London. It has a magic department near the main door. Suppose that management is considering dropping the magic department, which has consistently shown an operating loss. The predicted income statements, in thousands of pounds

Requirement

1. Should the magic department be closed? Explain, showing computations.

Requirement 1. Should the magic department be closed? Explain, showing computations.

Let's begin by analyzing the option of dropping the magic department and expanding the general merchandise department. Then you will analyze the option of dropping the magic department and expanding the electronics products department. (Enter all amounts in thousands of pounds. Round your answer to the nearest thousands of pounds. For cell with a

0

value, make sure to enter "0" in the appropriate cell.)

		Total						Company Totals
		Company		Drop		Expand		if Magic Dept is
		before		Magic		General		dropped and Gen.
		change		Dept.		Merch.		is expanded
		(a)		(b)		(c)		(a) - (b) + (c)
Sales		6,670
Variable expenses		4,397
Contribution margin		2,273
Fixed expenses		1,403
Ops income (loss)		870

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