Question

	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 ?

Answer 1

a) ANSWER :-

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

b) ANSWER : -

  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