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    Net Operating Income

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    The most recent monthly income statement for Kennaman Stores is given below:

    Total Store I Store II
    Sales $2,000,000 $1,200,000 $800,000
    Less variable expenses 1,200,000 840,000 360,000
    Contribution margin 800,000 360,000 440,000
    Less traceable fixed expenses 400,000 220,000 180,000
    Segment margin 400,000 140,000 260,000
    Less common fixed expenses 300,000 180,000 120,000
    Net operating income $ 100,000 $( 40,000) $140,000

    Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. (The decrease in sales would be the result of selling less units in store II, not due to reduced selling prices. In addition to sales, what other elements in the budget will be affected?) Kennaman allocates common fixed expenses on the basis of sales dollars.

    Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed

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    Solution Preview

    Net operating income of Store I $140,000

    Adjustments for closing Store I

    Additional traceable fixed expenses transferred to Store II
    $220,000 x 25% (55,000)

    Sales decrease for Store II

    Solution Summary

    The solution discloses two methods to calculate the effect of closing Store I. Both methods show all the adjustments necessary to make the calculations as if there were only Store II operating.