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 Total $2,000,000 Store 1 $1,200,000 Store 2 $800,000 Less variable expenses Total 1,200,000 Store 1 840,000 Store 2 360,000 Contribution margin Total 800,000 Store 1 360,000 Store 2 440,000 Less traceable fixed expenses Total 400,000 Store 1 220,000 Store 2 180,000 Segment margin Total 400,000 Store 1 140,000 Store 2 260,000 Less common fixed expenses Total 300,000 Store 1 180,000 Store 2 120,000 Net operating income Total $ 100,000 Store 1 $( 40,000) Store 2 $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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