Question

Condensed monthly income data for Thurber Book Stores are presented in the following table for November 20x1. (Ignore income taxes.)

	Mall Store						Downtown Store						Total
Sales		$	255,000					$	390,000				$	645,000
Less: Variable expenses			102,000						270,000					372,000
Contribution margin		$	153,000					$	120,000				$	273,000
Less: Fixed expenses			64,500						135,000					199,500
Operating income		$	88,500					$	(15,000	)			$	73,500

Additional Information:

• Management estimates that closing the downtown store would result in a 10 percent decrease in mall store sales, while closing the mall store would not affect downtown store sales.
• One-fourth of each store’s fixed expenses would continue through December 31, 20x2, if either store were closed.
• The operating results for November 20x1 are representative of all months.

Required:
1. Calculate the increase or decrease in Thurber’s monthly operating income during 20x2 if the downtown store is closed.
2. The management of Thurber Book Stores is considering a promotional campaign at the downtown store that would not affect the mall store. Annual promotional expenses at the downtown store would be increased by $195,000 in order to increase downtown store sales by 10 percent. What would be the effect of this promotional campaign on the company’s monthly operating income during 20x2?
3. One-half of the downtown store’s dollar sales are from items sold at their variable cost to attract customers to the store. Thurber’s management is considering the deletion of these items, a move that would reduce the downtown store’s direct fixed expenses by 15 percent and result in the loss of 20 percent of the remaining downtown store’s sales volume. This change would not affect the mall store. What would be the effect on Thurber’s monthly operating income if the items sold at their variable cost are eliminated?

1.)

Calculate the increase or decrease in Thurber’s monthly operating income during 20x2 if the downtown store is closed.

	Total -    in operating income -

2.)

The management of Thurber Book Stores is considering a promotional campaign at the downtown store that would not affect the mall store. Annual promotional expenses at the downtown store would be increased by $195,000 in order to increase downtown store sales by 10 percent. What would be the effect of this promotional campaign on the company’s monthly operating income during 20x2? (Round your final answer to the nearest whole dollar.)

	Total in operating income

3.)

One-half of the downtown store’s dollar sales are from items sold at their variable cost to attract customers to the store. Thurber’s management is considering the deletion of these items, a move that would reduce the downtown store’s direct fixed expenses by 15 percent and result in the loss of 20 percent of the remaining downtown store’s sales volume. This change would not affect the mall store. What would be the effect on Thurber’s monthly operating income if the items sold at their variable cost are eliminated?

	Total in operating income

Answer 1

The operating cost is affected by the changes in variable cost.

1. the increase or decrease in Thurberâs monthly operating income during 20x2 if the downtown store is closed.

Particulars	Mall stores
Sales ($255,000*90%)	$229,500
Less: Variable cost ($102,000/$255,000*$229,500)	$91,800
Contribution margin	$137,700
Less: Fixed cost	$64,500
Less: shutdown cost ($135,000*1/4)	$33,750
Net income	$39,450

The income of Thurber is reduced by $34,050 (73500-39450) if downtown store closed.

2. Income if promotional campaign conducted

Particulars	Mall stores	Downtown stores	Total
Sales	$255,000	(390,000*110%) =$429,000	$684,000
Less: variable cost	$102,000	$429,000*270,000/390,000 =$297,000	$399,000
Contribution margin	$153,000	$132,000	$285,000
Less: fixed cost	$64,500	$135,000	$199,500
Less: promotional expense	-	$195,000/12 =$16,250	$16,250
Net income	$88,500	(-$19,250)	$69,250

The net income is decreased by $4,250 if promotional campaign conducted.

3.income monthly statement

Particulars	Mall stores	Downtown stores	Total
Sales	$255,000	(390,000/2*80%) =$156,000	$411,000
Variable cost(less)	$102,000	(75,000/195,000*156,000) =$60,000	$162,000
Contribution margin	$153,000	$96,000	$249,000
Less fixed cost	$64,500	$114,750	$179,250
Net income	$88,500	$(-18,750)	$69,750

The net income is decreased by $3,750 [73,500-69,750] if the proposal is adopted.

Half of the original sales value of downtown store is $195,000

Variable cost remaining is $75,000 (270,000-195,000).