Sophia & More Company sells clothing, shoes and accessories at a city location near you. Information for the just concluded calendar year follows Clothing Shoes Accessories Sales $850,000 $320,000 $150,000 Less: Variables $510,000 $270,000 $ 82,500 Fixed costs $290,000 $ 70,000 $ 42,000 Total Costs $800,000 $340,000 $124,500 Operating income $ 50,000 $ (20,000) $ 25,500 Management is considering closing the Shoe segment because of the operating loss and is thinking about expanding the space that is currently devoted to the Accessories segment. A salaried salesperson in the Shoe segment who earns $45,000 will be terminated; however, all other segmental fixed costs will continue to be incurred. Sophia & More will spend $16,000 on remodeling costs and anticipates that sales in the Accessories segment will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the company. 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 segment is closed. Using incremental analysis, determine whether the Shoe segment should be closed and if so, what is the impact on the company’s (net) operating income.
Sophia & More Company sells clothing, shoes and accessories at a city location near you. Information for the just concluded calendar year follows
Clothing Shoes Accessories
Sales $850,000 $320,000 $150,000
Less: Variables $510,000 $270,000 $ 82,500
Fixed costs $290,000 $ 70,000 $ 42,000
Total Costs $800,000 $340,000 $124,500
Operating income $ 50,000 $ (20,000) $ 25,500
Management is considering closing the Shoe segment because of the operating loss and is thinking about expanding the space that is currently devoted to the Accessories segment. A salaried salesperson in the Shoe segment who earns $45,000 will be terminated; however, all other segmental fixed costs will continue to be incurred. Sophia & More will spend $16,000 on remodeling costs and anticipates that sales in the Accessories segment will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the company. 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 segment is closed.
Using incremental analysis, determine whether the Shoe segment should be closed and if so, what is the impact on the company’s (net) operating income.
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