Situation Four The most recent monthly income statement for Your Company is give
ID: 2449624 • 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
Particulars Store A Store B Total Sales 650000 900000 1550000 Less: Variable Expenses 225000 600000 825000 Variable expense= 225000/650000*100= 35% of sales Contribution 425000 300000 725000 Less: Traceable Fixed Expenses 110000 400000 510000 Store Segment Margin 315000 -100000 215000 Less: Common Fixed Expenses 50000 60000 110000 Net Operating Income 265000 -160000 105000 If Store B is closed Particulars Store A Store B Total Sales 520000 0 520000 Sales of A decreases by 20% Less: Variable Expenses 182000 0 182000 Variable expenses= 35% of sales Contribution 338000 0 338000 Less: Traceable Fixed Expenses 110000 140000 250000 35% of Traceable expenses of B remain unchanged Store Segment Margin 228000 -140000 88000 Less: Common Fixed Expenses 110000 0 110000 Common fixed expenses of 110000 will be allocated to store A as B has no sales Net Operating Income 118000 -140000 -22000 Hence, closing down Store B will result in losses for the organisation.