Question

The Boot Department at the Omaha Department Store is being considered for closure. The following information relates to boot activity: Sales revenue $ 350,000 Variable costs: Cost of goods sold 280,000 Sales commissions 30,000 Fixed operating costs 90,000 If 70% of the fixed operating costs are avoidable, should the Boot Department be closed?

Answer 1

Answer:

Yes, Omaha department store would be better off by $23000.

Explanation:

Given: Sales revenue= $350000.

           Cost of goods sold= $280000.

           Sales commission= $30000.

           Fixed operating cost= $90000.

Now, computing net profit or (loss)

Net profit/loss= $\textrm{sales revenue - cost of goods sold- sales\ commission - Avoidable fixed\ operating\ costs}$

∴ Net profit/loss= $350000-280000-30000-(90000\times 70\%)$

⇒ Net profit/loss= $40000-(63000)= (\ 23000)$

∴ Net loss= $\ 23000$

∴ Yes boot department should be closed, as Omaha department store is better off by $23000.