Question

The most recent monthly income statement for Benner Stores is given below:

Total

Store A

Store B

Sales

$ 1,000,000

$ 400,000

$ 600,000

Variable expenses

580,000

160,000

420,000

Contribution margin

420,000

240,000

180,000

Traceable fixed expenses

300,000

100,000

200,000

Store segment margin

120,000

140,000

(20,000)

Common fixed expenses

50,000

20,000

30,000

Net operating income

$ 70,000

$ 120,000

$ (50,000)



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:
Determine the monthly financial advantage (disadvantage) of closing Store B.

Answer 1

Closing Store B at Benner Stores would result in a net disadvantage of $70,000 per month when considering the saved traceable fixed expenses versus the lost contribution margin and the decreased sales in Store A.

Step-by-step explanation:

To determine the monthly financial advantage or disadvantage of closing Store B, we need to analyze the impact on the company's net operating income. We know that if Store B is closed, we save the variable expenses of $420,000 but also lose the sales of $600,000. However, if Store B's traceable fixed expenses are $200,000 and one-fourth will remain, then $150,000 of fixed expenses are saved. The remaining $50,000 would continue as a cost to Benner Stores. Additionally, we're informed that closing Store B would lead to a 10% decrease in Store A's sales, which currently amount to $400,000. This decrease in sales equals $40,000 (10% of $400,000).

As for the common fixed expenses, they are allocated based on sales, so with Store B's closure, all common fixed expenses would be reallocated to Store A. However, since the allocation basis is changing, not the total amount of common fixed expenses, initially, we'll disregard this in the advantage/disadvantage calculation.

To calculate the net change to overall profit, we combine the loss of contribution margin from Store B ($180,000), the reduced sales in Store A ($40,000), and the saved traceable fixed expenses ($150,000).

Change in profit = Saved traceable fixed expenses - (Loss of Store B's contribution margin + Decreased sales in Store A)
= $150,000 - ($180,000 + $40,000)
= $150,000 - $220,000
= -$70,000

Thus, closing Store B would result in a disadvantage of $70,000 per month.

Answer 2

the financial advantage of closing Store B is $132,000 - $70,000 = $62,000 per month.

Step-by-step explanation:

To determine the financial advantage (or disadvantage) of closing Store B, we need to calculate the net operating income that Benner Stores would have if Store B is closed.

First, we need to determine the new sales and contribution margin for Store A if Store B is closed. Since closing Store B would result in a 10% decrease in sales in Store A, the new sales for Store A would be $400,000 * 90% = $360,000. The contribution margin for Store A would be $360,000 - $160,000 = $200,000.

Next, we need to determine the traceable fixed expenses that would continue unchanged if Store B is closed. One-fourth of Store B's traceable fixed expenses are $200,000 * 1/4 = $50,000.

Then, we need to recalculate the common fixed expenses allocated to the stores based on their new sales. The common fixed expenses allocated to Store A would be $50,000 * $360,000 / $1,000,000 = $18,000.

Finally, we can calculate the net operating income for Benner Stores if Store B is closed:

Net operating income = Sales - Variable expenses - Traceable fixed expenses - Common fixed expenses

`= $360,000 - $160,000 - $50,000 - $18,000= $132,000`

Therefore, the financial advantage of closing Store B is $132,000 - $70,000 = $62,000 per month.