Question
Shown as follows is a segmented income statement for Drexel-Hall during the current month. All stores are similar in size, carry similar products, and operate
Shown as follows is a segmented income statement for Drexel-Hall during the current month.
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.
The marketing manager of Drexel-Hall is considering two alternative advertising strategies, each of which would cost $15,000 per month. One strategy is to advertise the name Drexel-Hall, which is expected to increase the monthly sales at all stores by 5 percent. The other strategy is to emphasize the low prices available at Store 2, which is expected to increase monthly sales at Store 2 by $150,000, but to reduce sales by $30,000 per month at Stores 1 and 3.
Determine the expected effect of each strategy on the companys overall income from operations.
Strategy 1 Expected ? In Monthly income from operations ?
Strategy 2 Expected ? In Monthly income from operations ?
| 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 | % | ||||||||||||||||||||||||
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