“We’ve got to eliminate Department A”, said Bob Cash,

“We’ve got to eliminate Department A”, said Bob Cash, vice president of your company, Bogoso Super Mall Ghana Limited. “It’s a drag on the entire organization. If anyone needs proof, just look at the last quarter’s income statement.” The statement to which Mr. Cash was referring to is shown below:

BOGOSO SUPER MALL GHANA LIMITED

INCOME STATEMENT FOR THE QUARTER ENDING JUNE 30, 2020

Total Dept A Dept B Dept C

GH₵ GH₵ GH₵ GH₵

Sales 7,500,000 1,400,000 3,500,000 2,600,000

Less Variable expenses 4,518,000 780,000 2,178,000 1,560,000

Contribution margin 2,982,000 620,000 1,322,000 1,040,000

Less Fixed expenses:

Direct advertising 487,500 130,000 200,000 157,500

General advertising

(allocated on sales) 150,000 28,000 70,000 52,000

Salaries 680,000 180,000 290,000 210,000

Rent on building 382,500 95,000 157,500 130,000

(allocated on space)

Utilities 154,500 40,000 68,000 46,500

Employer’s -SSNIT

(allocated on salaries paid) 102,000 27,000 43,500 31,500

Depreciation of fixtures 200,000 54,000 81,500 64,500

Insurance on inventory & fixtures 18,500 6,000 7,000 5,500

General office expenses 300,000 100,000 100,000 100,000

Service dept. expenses 225,000 75,000 75,000 75,000

2,700,000 735,000 1,092,500 872,500

Net income (loss) 282,000 (115,000) 229,500 167,500

You have been assigned the task of making a recommendation to the president as to whether or not Department A should be eliminated. You have gathered the following information:

i) All departments are housed in the same building. The store leases the entire building at a fixed annual rental rate.

ii) One of the employees in Department A is Mary Charles, who has been with the company for many years. If Department A is eliminated, Ms. Charles will be transferred to another department. Her salary is GH₵20,000 per quarter.

iii) If Department A is eliminated, the fixtures in the department will be transferred to the other departments.

iv) If Department A is eliminated, the utilities bill will be reduced by about GH₵35,000 per quarter.

v) One fourth of the insurance in Department A relates to the fixtures in the department; the remainder relates to the department’s merchandise inventory.

vi) The company has two service departments – purchasing and warehouse. If Department A is eliminated, the company can discharge one full-time and one part-time person from these departments. The combined salaries and other employment costs of these employees is GH₵26,500. General office expenses will not change

REQUIRED:

(A) Assume that the company has no alternative use for the space now being occupied by Department A. Prepare computations to show whether the department A should be eliminated. (You may assume that eliminating Department A would have no effect on the sales of the other departments).

(B) Assume that the space being occupied by Department A is quite valuable and could be subleased at a rental rate GH₵300,000 per quarter. Would you advise the company to eliminate Department A and sublease the space? Show computations.

(C) What other non-quantitative factors would you recommend that the company consider before deciding to eliminate Department A.