Question 1 - Drop or Retain a Segment15 marks

Northern Stores is a retailer in British Columbia. The most recent monthly income statement for Northern Stores is given below:

Total Store 1 Store II

Sales $2,100,000 $1,300,000 $800,000

Less variable expense 1,260,000 $882,000 $378,000

Contribution margin $840,000 $418,000 $422,000

Less traceable fixed expense 420,000 231,000 189,000

Segment margin $420,000 $187,000 $233,000

Less common fixed expense 350,000 210,000 140,000

Operating Income $70,000 $23,000 $93,000

Northern is considering closing Store I. If Store I is closed, one-fourth (25%) of its traceable fixed expenses would continue to be incurred. Also, the closing of Store I would result in a 20% decrease in sales in Store II.

Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down.

Required:Compute the overall increase or decrease in the operating income of Northern Stores if Store I is closed.