Situation Four The most recent monthly income statement for Your Company is give
ID: 2448305 • Letter: S
Question
Situation Four
The most recent monthly income statement for Your Company is given below:
Store A Store B Total
Sales $650,000 $900,000 $1,550,000
Variable expenses 225,000 600,000 825,000
Contribution margin 425,000 300,000 725,000
Traceable fixed expenses 110,000 400,000 510,000
Store segment margin 315,000 (100,000) 215,000
Common fixed expenses 50,000 60,000 110,000
Net operating income 265,000 $ (160,000) $105,000
Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, 35 percent of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 20 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars.
Required:
Compute the overall increase or decrease in the company's operating income if Store B is closed
Explanation / Answer
If Store B is continued If Store B is Closed Income Increase or (Decrease) Sales 1550000 520000 -1030000 Variable expenses 825000 180000 -645000 Contribution margin 725000 340000 -385000 Traceable fixed expenses 510000 250000 -260000 Store segment margin 215000 90000 -125000 Common fixed expenses 110000 50000 -60000 Net operating income 105000 40000 -65000