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Computing the Cost/Savings from Closing a Store

2. The most recent monthly income statement for Benner Stores is given below:
Store A Store B Total
Sales $400,000 $600,000 $1,000,000
Variable expenses 160,000 420,000 580,000
Contribution margin 240,000 180,000 420,000
Traceable fixed expenses 100,000 200,000 300,000
Store segment margin 140,000 (20,000) 120,000
Common fixed expenses 20,000 30,000 50,000
Net operating income $120,000 $(50,000) $70,000

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.

Required:

Compute the overall increase or decrease in the company's operating income if Store B is closed.

Solution Preview

The change in the company's operating income by closing Store B will be this:

Lost sales from Store B ($600,000)
Lost sales from Store A ( 40,000) ($400,000*.10)
Avoided variable costs from Store B ...

Solution Summary

Given the revenues and costs of a store, this solution illustrates how to determine the true cost of closing it.

$2.19