Emily has produced the following income statement for the ladies shoe department

ID: 2452759 • Letter: E

Question

Emily has produced the following income statement for the ladies shoe department of a large department store Sales $ 1,500,000 Less: Variable expenses 700,000 Contribution margin 800,000 Less: Fixed expenses: Wages $ 550,000 Insurance on inventory 20,000 Advertising 200,000 770,000 Net operating income $ 30,000Compared with other departments, the ladies shoe department has poor profitability. Management is considering dropping the department entirely. If the department is dropped, a job has to be created elsewhere for one employee who has been with the firm for many years. This employee has an annual salary of $40,000 and many years until retirement. Required: Calculate the increase or decrease in the operating income in both alternatives.

Explanation / Answer

Sales

$1,500,000.00

Variable Expenses

$700,000.00

Contribution Margin

$800,000.00

Less : Fixed Expenses

Wages

$550,000.00

Insurance on Inventory

$20,000.00

Advertising

$200,000.00

$770,000.00

Net Operating Income

$30,000.00

If the one Employee shifted to elsewhere than net operating income will increase by $40,000. and Net operating income would be $70,000.00.