Western Apparel Company owns two stores and management is considering eliminating the East store due to declining sales. Segmented contribution income statements are as follows and common fixed costs are allocated on the 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 eliminate the East store that sales in the West store will decline by 25%. If they close the 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.