16. Northern Company owns two stores and management is considering eliminating t
ID: 2455479 • Letter: 1
Question
16.
Northern Company owns two stores and management is considering eliminating the South store due to declining sales. Segmented contribution income statements are as follows and common fixed costs are allocated on the basis of sales.
North
South
Total
Sales
$475,000
120,000
$595,000
Variable costs
242,500
69,000
311,500
Direct fixed costs
72,500
35,500
108,000
Segment margin
160,000
15,500
175,500
Allocated fixed costs
104,500
48,000
152,500
Net Income
$55,500
($32,500)
$23,000
Northern feels that if they eliminate the South store, sales in the North store will decline by 20%. If they close the South store, overall company net income will:
A)
decline by $90,000.
B)
decline by $85,625.
C)
decline by $62,000.
D)
decline by $20,000.
16.
Northern Company owns two stores and management is considering eliminating the South store due to declining sales. Segmented contribution income statements are as follows and common fixed costs are allocated on the basis of sales.
North
South
Total
Sales
$475,000
120,000
$595,000
Variable costs
242,500
69,000
311,500
Direct fixed costs
72,500
35,500
108,000
Segment margin
160,000
15,500
175,500
Allocated fixed costs
104,500
48,000
152,500
Net Income
$55,500
($32,500)
$23,000
Northern feels that if they eliminate the South store, sales in the North store will decline by 20%. If they close the South store, overall company net income will:
A)
decline by $90,000.
B)
decline by $85,625.
C)
decline by $62,000.
D)
decline by $20,000.
Explanation / Answer
North % South Total Sales $475,000 $100 120,000 $595,000 Variable costs 242,500 51.05% 69,000 311,500 Direct fixed costs 72,500 35,500 108,000 Segment margin 160,000 15,500 175,500 Allocated fixed costs 104,500 48,000 152,500 Net Income $55,500 ($32,500) $23,000 After closing South Store North Sales $380,000 Variable costs 194,000 Direct fixed costs 72,500 Segment margin 113,500 Common Fixed costs 152,500 Net Income ($39,000) Earlier Total Net Income $23,000 Decline in net income $62,000 Option C is correct.
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