Q1) Western Apparel Company owns 2 stores and management is thinking eradicating East store due to declining sales. Segmented contribution income statements are given and common fixed costs are allocated on basis of sales.
|
|
West
|
East
|
Total
|
|
Sales
|
$525,000
|
90,000
|
$615,000
|
|
Variable costs
|
262,500
|
45,000
|
307,500
|
|
Direct fixed costs
|
62,500
|
25,000
|
87,500
|
|
Segment margin
|
200,000
|
20,000
|
220,000
|
|
Allocated fixed costs
|
137,500
|
35,000
|
172,500
|
|
Net Income
|
$62,500
|
($15,000)
|
$47,500
|
Western feels that if they eradicate East store that sales in West store will decline by 25%. If they close East store, overall company net income will:
a) Decline by $90,000.
b) Decline by $62,000.
c) Decline by $85,625.
d) Decline by $20,000.