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Managerial Accounting Sophistication Corners

Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Information for the just concluded calendar year follows.

Clothing Shoes Accessories
Sales $850,000 $320,000 $150,000
Less: Variable Costs $510,000 $270,000 $82,500
Fixed Costs $290,000 $70,000 $42,000
Total Costs $800,000 $340,000 $124,500
Operating Income (loss) $50,000 ($20,000) $25,500

Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophistication Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.

Determine whether the shoe department should be closed.

Solution Preview

Dear student,
The solution is provided in a separate excel file attached.It covers following statements and explanatory notes.

1 Statement of income-Contribution approach

2 Statement of income If Shoes Department is discontinued

3 Verification

4 Explanatory Notes : 1 If shoes Department is closed Net income of Sophistication Corner will decrease by $47500. as analysed above. ...

Solution Summary

Managerial accounting Sophistication Corners are examined.