Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows.
|
Clothing
|
Shoes
|
Accessories
|
|
Sales
|
$850,000
|
$320,000
|
$150,000
|
|
Varable Costs
|
$510,000
|
$270,000
|
$82,500
|
|
Fixed Costs
|
$290,000
|
$70,000
|
$42,000
|
|
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. Sophisticates' 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 by computing how much income will increase or decrease if the department is eliminated.