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28 August, 10:06

The Boot Department at the Omaha Department Store is being considered for closure. The following information relates to boot activity: Sales revenue $352,000 Variable costs: Cost of goods sold 282,000 Sales commissions 32,000 Fixed operating costs 92,000 If 80% of the fixed operating costs are avoidable, should the Boot Department be closed? A. Yes, Omaha would be better off by $35,600. B. Yes, Omaha would be better off by $54,000. C. No, Omaha would be worse off by $19,600. D. No, Omaha would be worse off by $38,000 E. None of the answers is correct.

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  1. 28 August, 10:20
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    Option (A) is correct.

    Explanation:

    Relevant profit / (Loss):

    = Sale revenue - Cost of goods sold - Sales commission - Avoidable fixed operating costs

    = $352,000 - $282,000 - $32,000 - (92,000 * 80%)

    = $352,000 - $282,000 - $32,000 - $73,600

    = ($35,600)

    Hence,

    Yes, Omaha would be better off by $35,600

    Note: The value in the parenthesis represents loss.
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