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.

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 $84,000, and sales at Store 2 to increase by $150,000. Closing Store 3 is not expected to cause any change in common fixed costs.

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.

Answer 1

	Drexel-Hall		Store 1		Store 2		Store 3
	Dollars	%	Dollars	%	Dollars	%	Dollars	%
Sales	$    14,34,000	100	$   6,84,000	100	$ 7,50,000	100	0	0
Variable costs	$      8,96,580	63	$   4,24,080	62	$ 4,72,500	63	0	0
Contribution margin	$      5,37,420	37	$   2,59,920	38	$ 2,77,500	37	0	0
Traceable fixed costs: controllable	$      2,22,000	15	$   1,20,000	18	$ 1,02,000	14	0	0
Performance margin	$      3,15,420	22	$   1,39,920	20	$ 1,75,500	23	0	0
Traceable fixed costs: committed	$      1,14,000	8	$       48,000	7	$      66,000	9	0	0
Store responsibility margin	$      2,01,420	14	$       91,920	13	$ 1,09,500	15	0	0
Common fixed costs	$         36,000	3
Income from operations	$      1,65,420	12
ANSWERS:
Total monthly sales	$    14,34,000
Monthly responsibility			$       91,920		$ 1,09,500
Company's monthly income from operations	$      1,65,420

REVISED SOLUTION:

		Drexel-Hall		Store 1		Store 2		Store 3
		Dollars	%	Dollars	%	Dollars	%	Dollars	%
	Sales	$     14,34,000	100	$ 6,84,000	100	$ 7,50,000	100	0	0
	Variable costs	$        8,96,580	63	$ 4,24,080	62	$ 4,72,500	63	0	0
	Contribution margin	$        5,37,420	37	$ 2,59,920	38	$ 2,77,500	37	0	0
	Traceable fixed costs: controllable	$        2,22,000	15	$ 1,20,000	18	$ 1,02,000	14	0	0
	Performance margin	$        3,15,420	22	$ 1,39,920	20	$ 1,75,500	23	0	0
	Traceable fixed costs: committed	$        1,80,000	13	$     48,000	7	$      66,000	9	66,000	0
	Store responsibility margin	$        1,35,420	9	$     91,920	13	$ 1,09,500	15	0	0
	Common fixed costs	$           36,000	3
	Income from operations	$           99,420	7
	ANSWERS:
a)	Total monthly sales	$     14,34,000
b)	Monthly responsibility margin			$     91,920		$ 1,09,500
c)	Company's monthly income from operations	$           99,420