Question

O'Neill, Incorporated income statement for the most recent month is given below. A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in fixed expenses of $8,000. If this proposal is implemented and sales remain constant, overall company net operating income should: Select one: a. remain the same b. decrease by $4,200 c. increase by $2,000 d. increase by $8,000

Answer 1

c. increase by $2,000

Explanation:

The computation of company net operating income is shown below:-

New amount for Store A variable expenses = Sales percentage × Store A sales

= 0.62 × $100,000

= $62,000

Change in net operating income = (Variable expenses of store A - New amount for Store A variable expenses) - Fixed expenses

= ($72,000 - $62,000) - $8,000

= $10,000 - $8,000

= $2,000 increase