Management is considering closing the shoe operation

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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.

Reference no: EM13572685

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