Question

Northern Stores is a retailer in the upper Midwest. The most recent monthly income statement for Northern Stores is given below:

	Total	Store I	Store II
Sales	$2,100,000	$1,300,000	$800,000
Less: Variable Expenses	1,260,000	882,000	378,000
Contribution Margin	840,000	418,000	422,000
Less: Traceable fixed expenses	420,000	231,000	189,000
Segment margin	420,000	187,000	233,000
Less: Common fixed expenses	350,000	210,000	140,000
Net Income	$70,000	$(23,000)	$93,000

Northern is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue to be incurred. Also, the closing of Store I would result in a 20% decrease in contribution margin in Store II. Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down.

Required:

Compute the overall increase or decrease in the net income of Northern Stores if Store I is closed.

Answer 1

IF store 1 is closed -
	Income of Store 2
	Contribution Margin		422000
	Less: 20% Decrease		84400
	Revised margin		337600
	Less:
	Traceable fixed expenses
	store 2		189000
	store 1		57750
			90850
	Less:
	Common fixed expense	350000
	net income		-259150
	Change in net income
	existing income		70000
	Overall decrease in net income	329150
	if store 1 is close