Question

Shown as follows is a segmented income statement for Drexel-Hall during the current month.

 

							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	%

 

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 company’s overall income from operations.