The most recent monthly income statement for Your Company is given below: total

Question

The most recent monthly income statement for Your Company is given below:
                  total                      store A                                Store B

Sales                  $1,000,000            400,0000                                600,000

Variable expenes    580,000              160,000                                    420,0000

contribution margin 420,000                240,000                                    180,000

Traceable fixed expenses   300,000        100,000                                    200,000

store segment margin         120,000         140,000                                       (20,000)

Common Fixed expenes      50,000            20,000                                      30,0000

Net operating income           70,000               120,0000                                   50,000

Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 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 closed :

contribution margin ratio of A = 420000 /1000000 = 42%

Traceable fixed cost of store B that will continue to incur (200000*1/4) 50000 Allocated fixed cost to store B will continue and charged to other product 30000 loss of contribution on sales of store A (1,000,000 *.10) = 100,000 *.42 42000 Total loss due to closing of store B 122,000 Decrease in company operating income 122,000

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