Problem 13-26 Eliminating a segment LO 13-4 Rooney Boot Co. sells men\'s, women\
ID: 2338136 • Letter: P
Question
Problem 13-26 Eliminating a segment LO 13-4 Rooney 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 to do so. Last year's income statements follow: ed Men' s Women' s Children's Department $ 210,000 (103,375) 106, 625 ok Department 690,000 (272,000) 418,000 Department $ 510,000 (181,600) 328, 400 nt Sales nces Gross margin Department manager's salary (65, 000) Sales commissions (119,200) Rent on store lease (34,000) (54,000) (34,000) (34, 400) (34,000) (17,000) Net income (loss) 182,800 134,800 (12,775) (88, 600) (34,000) Store utilities Required e. Calculate the contribution margin. Determine whether to eliminate the children's departmentExplanation / Answer
A) Calculation of contribution margin
Since contribution margin of Children's dept is positive.It should not be closed.
B-1 NET INCOME AS A WHOLE
B-2 Income statement without children dept
As we can see that after eliminating children dept net income is reduced to 266600 as compared to earlier profit of 304825.Hence our decision for not eliminating children dept was right.
C. Additional earning option
Additional earning due to eliminating children dept = 266600 + 45000 = 311600$
Since in this case profit has increased from 303825 to 311600 , hence this information will change our decision and accordingly child dept should be closed.
Particulars Men's dept women's dept Children Sales 690000 510000 210000 Less: Variable cost COGS (272000) (181600) (103375) Salary (65000) (54000) (34000) Sales commission (119200) (88600) (34400) CONTRIBUTION 233800 185800 38225