Question

# Total Store A Store B Sales \$1,000,000 \$400,000 \$600,000 Variable expenses 580,000 160,000 420,000 Contribution margin...

 Total Store A Store B Sales \$1,000,000 \$400,000 \$600,000 Variable expenses 580,000 160,000 420,000 Contribution margin 420,000 240,000 180,000 Traceable fixed expenses 300,000 100,000 200,000 Store segment margin 120,000 140,000 -20,000 Common fixed expenses 50,000 20,000 30,000 Net operating income \$70,000 \$120,000 (\$50,000)

Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars. (a) Determine the monthly financial advantage/disadvantage of closing Store B. (b) Should the store be closed ?

1) MONTHLY FINANCIAL ADVANTAGE OF CLOSING STORE B :-

1) Saving in loss of \$ 50,000

2) Saving in Traceable Fixed Cost portion = \$ 2,00,000 * 75 %

= \$ 1,50,000

3) Total Financial Advantage = \$ 50,000 + \$ 1,50,000

= \$ 2,00,000

2)  MONTHLY FINANCIAL DISADVANTAGE OF CLOSING STORE B :-

1) Traceable Fixed Cost unavoidable = \$ 2,00,000 * 25 %

= \$ 50,000

2) Decrease in Sales of Store A = Sales of Store A * 10 %

= \$ 4,00,000 * 10%

= \$ 40,0000

3) Total Financial Disadvantage = \$ 50,000 + \$ 40,000

= \$ 90,000

FINANCIAL ADVANTAGE OF CLOSING STORE B (-) FINANCIAL DISADVANTAGE OF CLOSING STORE B

= \$ 2,00,000 ( - ) \$ 90,000

= \$ 1,10,000

NET FINANCIAL ADVANTAGE BY CLOSING STORE B = \$ 1,10,000

ANSWER :- STORE B IS TO BE CLOSED