Question
Asked Oct 29, 2019
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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)
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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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Expert Answer

Step 1

Income Statement as per Variable Costing

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Step 2

Case 1:

Increased Accessories sales and termination of sales person of Shoe sector

Sophia and More Company
Clothing Shoes
850000 320000
Accessories Total
220000 1390000
Particulars
Sales
510000 270000
Less: Variable Cost
82500
862500
Contribution
340000
50000
137500
527500
Less: Fixed Cost
290000
25000
58000
373000
Operating Income
50000
25000
79500
154500
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Sophia and More Company Clothing Shoes 850000 320000 Accessories Total 220000 1390000 Particulars Sales 510000 270000 Less: Variable Cost 82500 862500 Contribution 340000 50000 137500 527500 Less: Fixed Cost 290000 25000 58000 373000 Operating Income 50000 25000 79500 154500

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Step 3

Incremental Analysi...

Incremental Analysis
Clothing ShoesAccessories Total
Particulars
Sales
70000
70000
Cost Saving
45000
45000
Incremental cost
Total Saving
-16000
16000
45000
54000
99000
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Incremental Analysis Clothing ShoesAccessories Total Particulars Sales 70000 70000 Cost Saving 45000 45000 Incremental cost Total Saving -16000 16000 45000 54000 99000

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