Should ABC Department Store Drop the Clothing Line? Business Analysis

This presentation analyzes the profitability of the clothing line within the ABC department store, focusing on whether the line should be discontinued. The analysis begins by highlighting the importance of operating margins and the relationship between revenue, fixed costs, and variable costs in determining a business's profitability. The clothing business has a 47% operating margin, better than the hardware business, but it's experiencing negative cash flow due to high fixed costs. The analysis recommends increasing the revenue base for the clothing business to better utilize fixed costs, increase the operating margin, and stabilize the company's net profitability. Supporting data, including sales, variable costs, contribution margins, fixed costs, and net income, are presented to justify the recommendation. References in APA format are provided to support the analysis.

Management
Accounting
ABC DEPARTMENT BUSINESS ANALYSIS

Clothing Business
 The key component in a business is the operating margin or the
profitability of the company.
 The profitability of the company is dependent on the revenue of
the company’s product and the expenses incurred for earning the
same revenue.
 Fixed cost and variable costs are the two key costs which should
be analysed and evaluated by the company.
 It is essential for the company to have a sound operating margin
and the net profitability of the company can be increased by
increasing the revenue base of the product (Campbell et al.
2015).

Business Analysis
 The operating margin of the Clothing Business is currently 47%
which is efficient than the Hardware Business.
 The key reason behind having a negative cash flow for the
company from the clothing business line is due to high fixed cost
involved in the business (Lee, 2016).
 The variable cost for the business will be dependent on the
production level of the business. The fixed cost for the company
can only be well utilized by the company if the production level of
the company is at a optimum stage (Zakeri et al. 2016).

Recommendation
 The company should increase the revenue base for the clothing
business so that it is well able to utilize the fixed cost of the
company.
 The rise in revenue base will increase the operating margin of the
company and utilize the fixed cost of the company on a per unit
basis optimally (Shepherd, 2015).
 The rise in variable cost for the business will not be as high as
rise in the revenue of the business.
 The company should not drop the business line if it is able to
increase the revenue base of the company by at least 20%
making the net profitability condition of the company stable.

Reference
 Campbell, J. F., De Miranda, G., De Camargo, R. S., & OKelly, M. E.
(2015, January). Hub location and network design with fixed and
variable costs. In System Sciences (HICSS), 2015 48th Hawaii
International Conference on (pp. 1059-1067). IEEE.
 Lee, R. T. (2016). Fixed and Variable Costs: When Accounting Is the
Opposite of Cash Flow Reality. Journal of Corporate Accounting &
Finance, 27(4), 31-35.
 Shepherd, R. W. (2015). Theory of cost and production functions (Vol.
2951). Princeton University Press.
 Zakeri, G., Pritchard, G., Bjørndal, M., & Bjørndal, E. (2016). Pricing
wind: a revenue adequate, cost recovering uniform auction for
electricity markets with intermittent generation. Univ. Aukland,
Auckland, New Zealand, Working Paper.

Appendix
Particulars Hardware Clothing Sporting Goods Total
Sales 10000 15000 25000 50000
Less: Variable costs 6000 8000 12000 26000
Contribution Margin 4000 7000 13000 24000
Operating Margin(%) 40% 47% 52%
Less: Fixed costs
Direct 2000 6500 4000 12500
Allocated 1000 1500 2500 5000
Total fixed costs 3000 8000 6500 17500
Fixed Cost (%) 30% 53% 26%
Net Income 1000 -1000 6500 6500