Determine whether the shoe department should be closed. 1 answer below »

Sophistication Corner sells clothing, shoes, and accessories at a suburban location in Boston. Information for the just concluded calendar year follows.

Clothing

Shoes

Accessories

Sales

$ 850,000

$ 320,000

$ 150,000

Less: Variable Costs

$ 510,000

$ 270,000

$ 82,500

Fixed Costs

290,000

70,000

42,000

Total Costs

$ 800,000

$ 340,000

$ 124,500

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. Sophistication 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.
Required:

Determine whether the shoe department should be closed.

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