Question

Wizards & Blizzards, a local entertainment store, has two departments -- Comics and Board Games. The company's most recent annual contribution format income statement follows Department Total Comics Board Games Sales 2,100,000.00 1,600,000.00 500,000.00 Variable expenses 700,000.00 450,000.00 250,000.00 Contribution margin 1,400,000.00 1,150,000.00 250,000.00 Fixed expenses 1,100,000.00 700,000.00 400,000.00 Net operating income (loss) 300,000.00 450,000.00 (150,000.00) Research indicates that $170,000 of the fixed expenses being charged to the Board Games department are sunk costs or allocated costs that will continue even if the Board Games department is dropped. In addition, the elimination of the Board Games department is expected to result in a 12% decrease in sales of the Comics department. ------------------------------------------

1. Currently, what % of sales is represented by the Board Games department (answer in decimal format to two places)?
2. If the Board Games department is dropped, what would be the total amount of contribution margin lost?
3. If the Board Games department is dropped, how much of fixed expenses could be avoided?
4. What is the financial advantage (disadvantage) of dropping the Board Games department?

Answer 1

The Board Games department represents 24% of total sales, dropping it would result in a loss of $250,000 in contribution margin, $230,000 in avoidable fixed expenses, and an overall financial disadvantage of $212,000.

Step-by-step explanation:

When assessing the performance of the Board Games department and contemplating its potential elimination, a series of calculations based on provided financial data should be conducted. Here are the answers to the questions posed:

1. The percentage of sales represented by the Board Games department is calculated by dividing the Board Games sales by the total sales: 500,000 / 2,100,000 which equals approximately 0.24 or 24% when expressed as a percentage.
2. The total amount of contribution margin lost if the Board Games department is dropped would be the contribution margin currently generated by it: $250,000.
3. The amount of fixed expenses that could be avoided if the Board Games department is eliminated equals the total fixed expenses minus the sunk/allocated costs that will continue: $400,000 - $170,000 = $230,000.
4. To determine the financial advantage or disadvantage of dropping the Board Games department, the following should be considered: the lost contribution margin ($250,000), the reduction in Comics sales (12% of $1,600,000 is $192,000), and the savings in fixed expenses ($230,000). The net effect is a disadvantage of $250,000 - $192,000 + $230,000 = -$212,000, indicating a financial disadvantage in eliminating the Board Games department.