Pease explain me how to get the answer? Condensed monthly operating income data

ID: 2485057 • Letter: P

Question

Pease explain me how to get the answer?

Condensed monthly operating income data for chestnut Inc. for October is presented below. Additional information regarding chestnut operations is as follows: chestnut allocates common fixed expenses to each store on the basis os sales dollars: Management estimates that closing the town store would result in a ten percent decrease in Mall Store's unit sales. The operating results for October are representative of all months. A decision by Chestnut Inc. to close the town store would result in a monthly increase or decrease in Chestnut's operating income of: $ 4,000 decrease $ 3,000 decrease $ 2,500 decrease $ 1,000 increase $ 4,000 increase Please explain me how to get the answer?

Explanation / Answer

Solution:

First of all we need to understand what is traceable fixed cost?

Traceable Fixed Cost is the cost which has direct relationship with a cost object. Cost object may be product, process, customer etc. Traceable Fixed cost disappears if the cost object ends or goes away.

In this question by closing the Town Store the company will save traceable fixed cost associated with Town Store. Hence the statement of cost or income analysis will be as follows:

Contribution Loss if the town store closes

($36,000)

Saving in Traceable Fixed Cost associated with the Town Store if it is closed

$40,000

Less: 10% Contribution Loss in Mall Store's units sales (30,000*10%)

($3,000)

Net Increase in monthly operating profit of company

$1,000

Note – Common Fixed Cost is irrelevant in decision making because common fixed cost is the cost which will be incurred to the company whether they close the store or not. Hence the cost which remains same under different alternative course of action is irrelevant for decision making.