Required: 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 company's monthly income from operations.
Required: 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 company's monthly income from operations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Shown as follows is a segmented income statement for Drexel-Hall during the current month:
Sales
Variable costs
Contribution margin
Traceable fixed costs: controllable
Performance margin
Traceable fixed costs: committed
Store responsibility margin
Common fixed costs
Income from operations
Drexel-Hall
Dollars
$ 1,800,000
1,080,000
$ 720,000
432,000
$ 288,000
180,000
$ 108,000
36,000
$ 72,000
%
100%
60
40%
24
16%
10
6%
2
4%
Required:
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 company's monthly income from operations.
Required A Required B Required C
Store 1
Dollars
$ 600,000
372,000
$ 228,000
120,000
$ 108,000
48,000
$ 60,000
Complete this question by entering your answers in the tabs below.
%
100%
62
38%
20
18%
8
10%
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.
Profit Centers
Store 2
Dollars
$ 600,000
378,000
$ 222,000
102,000
$ 120,000
66,000
$ 54,000
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 $79,000, and sales at Store 2 to increase by $139,000. Closing
Store 3 is not expected to cause any change in common fixed costs.
%
100%
63
37%
17
20%
11
9%
Store 3
Dollars
$ 600,000
330,000
$ 270,000
210,000
$ 60,000
66,000
$ (6,000)
%
100%
55
45%
35
10%
11
(1)%
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Step 1: Definition of segmented income statement:
VIEWStep 2: Working note- Preparing a segmented income statement assuming store 3 is closed:
VIEWStep 3: Requirement a- Calculation of increase/decrease in total monthly sales:
VIEWStep 4: Requirement b- Calculation of increase/decrease in monthly responsibility margin of the stores:
VIEWStep 5: Requirement c- Calculation of increase/decrease in monthly income from operations:
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