Exercise 22.7 (Static) Closing an Unprofitable Business Unit (LO22-1, LO22-2, LO22-3, LO22-5)

Shown as follows is a segmented income statement for Drexel-Hall during the current month.

I've just signed in and seeing the solution that I only wanted to know, which is "Financial & Managerial Accounting (18th Edition) " Chapter 22, Problem 7E.

However, the solution shown is so poor that it can be recognized that it's totally wrong at first glance.

There are even some comments that telling it's wrong and it's still not corrected, and it's very disappointing.

So, this is the Question.

I cannot solve the question b. and c.

Exercise 22.7 (Static) Closing an Unprofitable Business Unit (LO22-1, LO22-2, LO22-3, LO22-5)

Shown as follows is a segmented income statement for Drexel-Hall during the current month.

							Profit Centers
	Drexel-Hall							Store 1							Store 2							Store 3
	Dollars				%			Dollars				%			Dollars				%			Dollars			%
Sales	$	1,800,000			100	%		$	600,000			100	%		$	600,000			100	%		$	600,000			100		%
Variable costs		1,080,000			60				372,000			62				378,000			63				330,000			55
Contribution margin	$	720,000			40	%		$	228,000			38	%		$	222,000			37	%		$	270,000			45		%
Traceable fixed costs: controllable		432,000			24				120,000			20				102,000			17				210,000			35
Performance margin	$	288,000			16	%		$	108,000			18	%		$	120,000			20	%		$	60,000			10		%
Traceable fixed costs: committed		180,000			10				48,000			8				66,000			11				66,000			11
Store responsibility margin	$	108,000			6	%		$	60,000			10	%		$	54,000			9	%		$	(6,000	)		(1	)	%
Common fixed costs		36,000			2
Income from operations	$	72,000			4	%

All stores are similar in size, carry similar products, and operate in similar neighborhoods. Store 1 was established first and was built at a lower cost than were Stores 2 and 3. This lower cost results in less depreciation expense for Store 1. Store 2 follows a policy of minimizing both costs and sales prices. Store 3 follows a policy of providing extensive customer service and charges slightly higher prices than the other two stores.

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 companys monthly income from operations.