Question

Shown as follows is a segmented income statement for Drexel-Hall during the current month. Profit Centers...

Shown as follows is a segmented income statement for Drexel-Hall during the current month.

Profit Centers

Drexel-Hall

Store 1

Store 2

Store 3

Dollars % Dollars % Dollars % Dollars %
Sales $ 1,800,000 100 % $ 600,000 100 % $ 600,000 100 % $ 600,000 100 %
Variable costs 1,080,000 60 372,000 62 378,000 63 330,000 55
Contribution margin $ 720,000 40 % $ 228,000 38 % $ 222,000 37 % $ 270,000 45 %
Traceable fixed costs: controllable 432,000 24 120,000 20 102,000 17 210,000 35
Performance margin $ 288,000 16 % $ 108,000 18 % $ 120,000 20 % $ 60,000 10 %
Traceable fixed costs: committed 180,000 10 48,000 8 66,000 11 66,000 11
Store responsibility margin $ 108,000 6 % $ 60,000 10 % $ 54,000 9 % $ (6,000 ) (1 ) %
Common fixed costs 36,000 2
Income from operations $ 72,000 4 %


All stores are similar in size, carry similar products, and operate in similar neighborhoods. Store 1 was established first and was built at a lower cost than were Stores 2 and 3. This lower cost results in less depreciation expense for Store 1. Store 2 follows a policy of minimizing both costs and sales prices. Store 3 follows a policy of providing extensive customer service and charges slightly higher prices than the other two stores.

Top management of Drexel-Hall is considering closing Store 3. The three stores are close enough together that management estimates closing Store 3 would cause sales at Store 1 to increase by $60,000, and sales at Store 2 to increase by $120,000. Closing Store 3 is not expected to cause any change in common fixed costs.

Compute the increase or decrease that closing Store 3 should cause in:

a. Total monthly sales for Drexel-Hall stores. Answer = 420,000

b. The monthly responsibility margin of Stores 1 and 2.

c. The company’s monthly income from operations.

CAN SOMEONE PLEASE EXPLAIN B AND C?

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