Question

O'Neill, Incorporated's segmented income statement for the most recent month is given below.

	Total Company	Store A	Store B
Sales	$407,000	$133,000	$274,000
Variable expenses	264,230	97,090	167,140
Contribution margin	142,770	35,910	106,860
Traceable fixed expenses	89,800	31,600	58,200
Segment margin	52,970	$4,310	$48,660
Common fixed expenses	28,350
Net operating income	$24,620

For each of the following questions, refer back to the above original data.

A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in Store A's traceable fixed expenses of $12,650. If this proposal is implemented and sales remain constant, overall company net operating income should:

rev: 07_14_2016_QC_CS-55575, 10_06_2016_QC_CS-64567, Noreen 4e Rechecks 2017-24-03

increase by $1,980

decrease by $12,650

decrease by $1,980

remains the same

Answer 1

• All working forms part of the answer
• Working #1 for effect of proposed plan for Store A:

		Store A
Working		Current Scenario	Proposed Scenario
A	Sales	$                           133,000.00	$             133,000.00
B	Variable expenses	$                             97,090.00	$               82,460.00 [$ 133,000 x 62%]
C = A - B	Contribution margin	$                             35,910.00	$               50,540.00
D	Traceable Fixed expense	$                             31,600.00	$               44,250.00 [$ 31,600 + $ 12,650]
E = C - D	Segment Margin	$                               4,310.00	$                 6,290.00

• Answer

A [calculated above]	Segment Margin under Proposed Scenario	$                               6,290.00
B [calculated above]	Segment Margin under Current Scenario	$                               4,310.00
C = A - B	Increase in Net Operating Income	$                               1,980.00
	Correct Answer	Option #1: Increase by $ 1,980