The most recent monthly income statement for Kennaman Stores is given below: Tot

Question

The most recent monthly income statement for Kennaman Stores is given below:


Total
Store I
Store II

Sales
$2,000,000
$1,200,000
$800,000

Less variable expenses
1,200,000
840,000
360,000

Contribution margin
800,000
360,000
440,000

Less traceable fixed expenses
400,000
220,000
180,000

Segment margin
400,000
140,000
260,000

Less common fixed expenses
300,000
180,000
120,000

Net operating income
$ 100,000
$( 40,000)
$140,000
Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. (The decrease in sales would be the result of selling fewer units in store II, not due to reduced selling prices. In addition to sales, what other elements in the budget will be affected?) Kennaman allocates common fixed expenses on the basis of sales dollars.
Required:
Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.

Explanation / Answer

If store I is closed
New Total traceable fixed expenses = 220000*25% + 180000 = 235000
New Total Sales = 0 + 800000*90% = 720000
New Variable Expenses = 0 + 360000 = 360000
New Contribution Margin = New Sales - New Variable Expenses = 720000 - 360000 = 360000
New Segment Margin = New Contribution Margin - New Total traceable fixed expenses = 360000 - 235000 = 125000
New Common fixed expenses = 0 + 120000 = 120000
New Net Operating income = New Segment Margin - New Common fixed expenses = 125000 - 120000 = 5000

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