Decision on closure of one of the units with the help of decrease in net 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.
Required:
Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.