Hawkeye Golf is considering dropping the clothing department because it is not generating a profit as disclosed by the following data:
Sales $1,800
Cost of Goods Sold 800
Gross Profit $1,000
Direct Expenses 700
Contribution Margin 300
Indirect Expenses (500)
Net Loss $(200)
Note: None of the indirect expenses can be avoided by dropping the department.
Should Hawkeye drop the department? Show your computations.
What will be an ideal response?
Answer: At this point the department is contributing $300 toward covering the indirect cost ($1,000 - $700). If the department is eliminated, the other department(s) must absorb the $500 indirect cost. At this time, since part of the indirect expenses is Purchases Discount being covered, keep the clothing department until other departments may be able to absorb the difference.
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