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Net Operating Income

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.

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

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.

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