Question

The most recent monthly income statement for Sun Shine Corporation 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:

Determine the monthly financial advantage (disadvantage) of closing Store B. (Provide side by side comparison calculations)

Answer 1

Solution:

Differential Analysis
Continue Store B (Alt. 1) or Discontinue Store B (Alt. 2)
Particulars	Continue Store B (Alt 1)	Discontinue Store B (Alt 2)	Financial advantage (disadvantage) (Alternative 2)
Sales	$1,000,000.00	$360,000.00	-$640,000.00
Variable expenses	$580,000.00	$144,000.00	-$436,000.00
Contribution margin	$420,000.00	$216,000.00	-$204,000.00
Traceable fixed expenses	$300,000.00	$150,000.00	-$150,000.00
Segment margin	$120,000.00	$66,000.00	-$54,000.00
Common fixed expenses	$50,000.00	$50,000.00	$0.00
Net operating income	$70,000.00	$16,000.00	-$54,000.00