|
Particulars |
Children’s Department |
|
Sales |
$60,000 |
|
Cost of goods sold |
-$35,000 |
|
Department manager’s salary |
-$12,000 |
|
Sales commissions |
-$9,000 |
|
Contribution |
$4,000 |
The above table indicates that the Children’s Department is producing a contribution of $4,000, which is positive before the relevant deductions from the fixed cost. The overall Children’s Department should not be eliminated, as the company is still having a contribution of $4,000 from the operations, as fixed cost should not be included due to its irrelevancy towards the overall decision while making a relevant judgment regarding the operations of the department.
|
Particulars |
Men’s Department |
Women’s Department |
Children’s Department |
Total |
|
Sales |
$250,000 |
$300,000 |
$60,000 |
$610,000 |
|
Cost of goods sold |
-$105,000 |
-$125,000 |
-$35,000 |
-$265,000 |
|
Gross margin |
$145,000 |
$175,000 |
$25,000 |
$345,000 |
|
Department manager’s salary |
-$26,000 |
-$30,000 |
-$12,000 |
-$68,000 |
|
Sales commissions |
-$43,000 |
-$49,000 |
-$9,000 |
-$101,000 |
|
Rent on store lease |
-$10,500 |
-$10,500 |
-$10,500 |
-$31,500 |
|
Store utilities |
-$2,000 |
-$2,000 |
-$2,000 |
-$6,000 |
|
Net income (loss) |
$63,500 |
$83,500 |
-$8,500 |
$138,500 |
|
Particulars |
Men’s Department |
Women’s Department |
Children’s Department |
Total |
|
Sales |
$250,000 |
$300,000 |
$550,000 |
|
|
Cost of goods sold |
-$105,000 |
-$125,000 |
-$230,000 |
|
|
Gross margin |
$145,000 |
$175,000 |
$320,000 |
|
|
Department manager’s salary |
-$26,000 |
-$30,000 |
-$56,000 |
|
|
Sales commissions |
-$43,000 |
-$49,000 |
-$92,000 |
|
|
Rent on store lease |
-$10,500 |
-$10,500 |
-$10,500 |
-$31,500 |
|
Store utilities |
-$2,000 |
-$2,000 |
-$2,000 |
-$6,000 |
|
Net income (loss) |
$63,500 |
$83,500 |
-$12,500 |
$134,500 |
The above table provides information on contribution with and without the children’s department, which can help in understanding the level of net income generated by the company. Hence, the calculations indicate that using the Children’s Department would mainly allow the organisation to generate a total net income of $138,500. However, without the Children’s Department, the organisation’s total net income mainly decline to the level of $134,500. Hence, the company total net income mainly declines by $4,000, if the company discontinues the Children’s Department. Thus, the overall analysis indicates that the Children’s Department was absorbing the loss of $4,000 from its operations, where the organisation should continue with all the operations and should not close the Children’s Department.
The overall analysis indicates that the Children’s department should be eliminated with the additional level of net earnings of the organisation. Therefore, the increment in net earnings of $10,000 would mainly reduce the levels of losses, as it is greater than a contribution to profit of $4,000. Drury (2018) indicates that using contribution and net income calculations would mainly allow the organisation to detect the financial viability of each department and take decisive actions regarding the progress of the company. Thus, the children’s department would increase space available to display men’s and women’s boots, which would increase the overall net earnings by $10,000, while improving the returns from the investment. Therefore, the space should be utilised to display men and women’s boots, as it would generate a return of $6,000 ($10,000-$4,000). Thus, the overall analysis indicates that the Children’s department operation should be eliminated, as the new opportunity would genre high contribution to the organisation.
References:
Drury, C. (2018). Cost and management accounting. Cengage Learning.
Shields, M. D. (2015). Established management accounting knowledge. Journal of Management Accounting Research, 27(1), 123-132.
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