5. The most recent monthly income statement for Benner Stores is given below: To

Question

5. The most recent monthly income statement for Benner Stores is given below: Total Store A Store B Sales Variable expenses Contribution margin Traceable fixed expenses Store segment margin Common fixed expenses Net operating income $1,000,000 $400,000 $600,000 580,000 160,000 420,000 420,000 240,000 180,000 300,000 100,000 200,000 120,000 140,000 (20,000) 50,000 20,000 30,000 70,000 $120,000 S(50,000) Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, also show that closing Store B would result in a 10 percent decrease in sales in Store A company allocates common fixed expenses to the stores on the basis of sales dollars. one-fourth of its traceable fixed expenses will continue unchanged. The studies . The Required: Determine the monthly financial advantage (disadvantage) of closing Store B

Explanation / Answer

Sales will drop by 10% so the new sales figure is = 0.9*400000 = 360000

As the sales is droppig by 10%, the variable expense would also drop by 10 %, so the new Variable expense figure is = 0.9*160000 = 144000

One fourth of the Traceable fixed expense would continue to be incurred, which will get added to the new Traceable Fixed expense, which would be = 100000 + 0.25*200000 = 150000

The common fixed enpense would now be completely spent by Store A. Thus Common Fixed Expense will be 50000

Now we shall make the calculations-

Sales - 360000

Variable Expense = 144000

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Contribution Margin = 360000-144000 = 216000

Traceable Fixed Expenses = 150000

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Store segment margin = 216000-150000 = 66000

Common Fixed Expense = 50000

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Net Operating Income = 16000

We shall see that the Operating Income decreases from 70000 to 16000 inspite of closing Store B. This is a disadvantageous situation and hence should be avoided. The Monthly Financial Disadvantage = 70000-16000 = 54000

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