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Income Statement - Robert's House of Formals

Please view the attached file for proper formatting of this problem.

The most recent income statement for the men's formal wear department of Robert's House of Formals is given below:

Sales... $500,000
Variable expenses... 200,000
Contribution margin... 300,000
Fixed expenses:
Salaries and wages... $150,000
Insurance on inventories... 10,000
Depreciation of fixtures* 65,000
Advertising 100,000 325,000
Net operating income (loss)... $25,000

*Six years remaining useful life, with little or no current resale value.

Management is thinking about dropping the men's formal wear department. If the department is dropped, a make work position will be found for one long time employee who is due to retire in several years. The employee's salary is $30,000. The fixtures in the department would have no resale value and would be hauled to the county dump.

Prepare an analysis, using the following form to determine whether the department should be dropped.

Contribution margin lost if the department is dropped... $300,000
Less avoidable fixed costs:
Salaries and wages... $120,000
Insurance on inventories... 10,000
Advertising 100,000 230,000
Increase (decrease) in net operating income... ($ 70,000)

Redo the analysis using the alternate format shown below:

Keep Drop Difference:
Department Department Income increase or (decrease)
Sales... $500,000 $________ $________
Variable expenses.... 200,000 _________ _________
Contribution margin... 300,000 _________ _________
Fixed expenses:
Salaries & wages... 150,000 _________ _________
Insurance on inventories... 10,000 _________ _________
Depreciation or fixtures*... 65,000 _________ _________
Advertising... 100,000 _________ _________
Total fixed expenses... 325,000 _________ _________
Net operating income (loss)... $25,000 $________ $________

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Solution Summary

This solution is provided in an attached Word document, which explains how to determine if a department should be dropped based on the given financial data in this problem. The solution is concise and easy to follow.

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