1 answer

Fashion Clothing sells clothing, shoes, and accessories at a location in Los Angeles, CA. Information for...

Question:

  1. Fashion Clothing sells clothing, shoes, and accessories at a location in Los Angeles, CA. 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. TWU Clothing 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.

Required:

Your supervisor has asked you to determine whether the shoe department should be closed and the effect upon income if closed.


Answers

Existing scenario Particulars Sales Variable costs Fixed costs Total cost Operating Income Clothing Shoes Accessories Total $

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