Financial Reporting Knight Fashions Should

Financial Reporting Knight Fashions should not drop any department. The fixed costs will remain the same no matter how many departments the store has. Each department makes a contribution to the fixed costs. For example, Men's contributes $45,000; Women's contributes $24,000 and Accessories contributes $20,000. The removal of any of these contributions would leave Knight Fashions with a loss. This assumes that the space no longer used for the department will now sit idle. However, that is typically not the situation at a department store.

In all likelihood Knight would use that space for another department. One assumption is that sales of the departments are scalable such that revenues will increase in line with an increase in square footage. If that were assumed to be true, Knight should drop both Women's and Accessories, since Men's generates the most profit per square foot. Men's takes up 35.7% of the store but generates 50.56% of the contribution. Women's takes up 28.5% of the store and generates 26.9% of the contribution. Accessories takes up 35.7% of the store and generates 22.4% of the contribution.

Therefore, Men's delivers the most contribution per square foot, meaning that if we assumed revenues to be fully scalable, Knight should drop both Women's and Accessories and sell only Men's. If the entire store was Men's, Knight Fashions would have a profit of $56,000. However, it is not known if revenues and profits for any of the departments are scalable. Therefore, Knight Fashions should continue to operate all three departments. This will retain profitability, and to drop any one department will result in a loss. 2. Sport Cardz should take the order.

Their contribution from a pack of cards will be $0.35. Sport Cardz has excess capacity. Therefore, the fixed overhead charge would otherwise be applied to other orders in their system. The order utilizes the capacity and contributes a positive net cash flow of $2,500, even though the overhead charge renders it unprofitable in the accounting sense. In determining whether or not Sport Cardz should take the order, they must consider cash flow rather than accounting profit.

If they did not take the order, the overhead charge would be applied elsewhere anyway, so it is not included in the decision-making process. The order will therefore generate $20,000 in revenues and costs of $17,500. This leaves a positive cash flow of $2,500 that will be applied to the fixed overhead. The choice of allocation method, from which the actual charge is derived, is irrelevant to the decision of whether or not to take the order. 3. Fixed Systems should continue to make the switch.

If they purchased the switch from the other company, their cost would be the switch cost plus the overhead cost. This.