Question - Boundaries, a chain of retail stores, sells books and music CDs. Condensed monthly income data are presented in the following table for November 20x4.
|
Downtown Store
|
Mall Store
|
Total
|
|
Sales
|
$240,000
|
$360,000
|
$600,000
|
|
Less : Variable Expenses
|
96,000
|
252,000
|
348,000
|
|
Contribution Margin
|
$144,000
|
$108,000
|
$252,000
|
|
Less : Fixed Expenses
|
60,000
|
120,000
|
180,000
|
|
Operating Income
|
$84,000
|
$(12,000)
|
$72,000
|
Additional information:
- Management estimates that closing the mall store would result in a 10 percent decrease in downtown store sales, while closing the downtown store would not affect mall store sales.
- One fourth of each store's fixed expenses would continue through December 31, 20x5, if either store were closed.
- The operating result for November 20x4 are representative of all months.
Required:
a) Calculate the increase or decrease in Boundaries' monthly operating income during 20x5 if the mall store is closed.
b) The management of Boundaries is considering a promotional campaign at the mall store that would not affect the downtown store. Annual promotional expenses at the mall store would be increased by $180,000 in order to increase mall store sales by 10 percent. What would be the effect of the promotional campaign on the company's monthly operating income during 20x5?
c) One-half of the mall store's dollar sales are from items sold at their variable cost to attract customers to the store. Boundaries' management is considering the deletion of these items, a move that would reduce the mall store's direct fixed expenses by 15% and result in the loss of 20% of the remaining mall store's sales volume. This change would not affect the downtown store. What would be the effect on Boundaries' monthly operating income if the items sold at their variable cost are eliminated?