Question
The most recent monthly income statement for Jhingle Stores is given below: Total Store A Store B Sales................................... $1,000,000 $400,000 $600,000 Variable expenses.............. 580,000 160,000
The most recent monthly income statement for Jhingle Stores is given below:
|
| Total | Store A | Store B |
| Sales................................... | $1,000,000 | $400,000 | $600,000 |
| Variable expenses.............. | 580,000 | 160,000 | 420,000 |
| Contribution margin.......... | 420,000 | 240,000 | 180,000 |
| Traceable fixed expenses... | 300,000 | 100,000 | 200,000 |
| Store segment margin........ | 120,000 | 140,000 | (20,000) |
| Common fixed expenses... | 50,000 | 20,000 | 30,000 |
| Net operating income........ | $ 70,000 | $120,000 | ($ 50,000) |
Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars.
Required:
- Prepare a differential analysis to compute the overall increase or decrease in the company's operating income if Store B is closed. Should it be closed or not?
- Aside from the financial consideration, what should a company consider when making a decision to close a segment of the business? Which of these considerations should be given more weight?
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