Question

Sophia & More Company sells clothing, shoes and accessories at a city location near you. Information for the just concluded calendar year follows.

 

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.

Required:

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.

Clothing
$850.000
$510,000
290,000
$800,000
$ 50,000
Shoes
$320,000
$270,000
70,000
$340.000
S(20,000)
Accessories
$150.000
82,500
42.000
$124.500
S 25,500
Sales
Less: Variable costs
Fixed costs
Total costs
Operating income (loss)

Image Transcription

Clothing $850.000 $510,000 290,000 $800,000 $ 50,000 Shoes $320,000 $270,000 70,000 $340.000 S(20,000) Accessories $150.000 82,500 42.000 $124.500 S 25,500 Sales Less: Variable costs Fixed costs Total costs Operating income (loss)

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