Question

Top management of Drexel-Hall is considering closing Store 3. The three stores are close enough together that management estimates closing Store 3 would cause sales at Store 1 to increase by $60,000, and sales at Store 2 to increase by $120,000. Closing Store 3 is not expected to cause any change in common fixed costs. Compute the increase or decrease that closing Store 3 should cause in: a. Total monthly sales for Drexel-Hall stores. b. The monthly responsibility margin of Stores 1 and 2. c. The company’s monthly income from operations. Williams, Jan. Financial & Managerial Accounting (p. 980). McGraw-Hill Higher Education. Kindle Edition.

Answer 1

Closing Store 3 will result in increased total monthly sales of $180,000 for Drexel-Hall. The monthly responsibility margin for Stores 1 and 2 will also increase by their respective sales increases. Drexel-Hall's monthly income from operations may vary based on Store 3's previous contribution and additional variable costs from increased sales.

Step-by-step explanation:

Impact of Closing Store 3 on Drexel-Hall's Financials

To compute the change in total monthly sales for Drexel-Hall after closing Store 3, we add the increased sales of Store 1 and Store 2. This results in a net increase of $60,000 + $120,000 = $180,000 in monthly sales for Drexel-Hall.

Regarding the monthly responsibility margin of Stores 1 and 2, since the closure of Store 3 does not affect common fixed costs and only increases sales, we can infer that the responsibility margin of these stores will increase by the amount of increased sales, assuming that variable costs per additional sale remain constant.

For the company's monthly income from operations, since Store 3 is being closed, we must subtract any contribution margin Store 3 was providing to the overall income. If Store 3 was operating at a loss, closing it might increase the overall income, whereas if it contributed positively, the overall income might decrease. The increased sales at Stores 1 and 2 would contribute to the overall income minus any additional variable costs resulting from the increase in sales.

Answer 2

Compute the increase or decrease that closing Store 3 should cause in: a. Total monthly sales for Drexel-Hall stores.

• total monthly sales should decrease from $1,800,000 to $1,380,000 = a $420,000 reduction

b. The monthly responsibility margin of Stores 1 and 2.

• store 1 responsibility margin increased from 10% to 12.55% (2.55% increase)
• store 2 responsibility margin increased from 9% to 13.69% (4.69% increase)

c. The company’s monthly income from operations.

• increased from $72,000 to $140,200 ($70,200 increase)

Step-by-step explanation:

Store Store Total

1 2

Sales $660,000 $720,000 $1,380,000

Variable costs $409,200 $453,600 $862,800

Contribution margin $250,800 $266,400 $517,200

Controllable fixed costs $120,000 $102,000 $222,000

Performance margin $130,800 $164,600 $292,200

Committed fixed costs $48,000 $66,000 $114,000

Store responsibility margin $82,800 $98,600 $178,200

Common fixed costs $38,000

Income from operations $140,200