Question

The most recent monthly income statement for Kennaman Stores is given below: Total Store I Store II Sales Total $2,000,000 Store 1 $1,200,000 Store 2 $800,000 Less variable expenses Total 1,200,000 Store 1 840,000 Store 2 360,000 Contribution margin Total 800,000 Store 1 360,000 Store 2 440,000 Less traceable fixed expenses Total 400,000 Store 1 220,000 Store 2 180,000 Segment margin Total 400,000 Store 1 140,000 Store 2 260,000 Less common fixed expenses Total 300,000 Store 1 180,000 Store 2 120,000 Net operating income Total $ 100,000 Store 1 $( 40,000) Store 2 $140,000 Kennaman is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Kennaman allocates common fixed expenses on the basis of sales dollars. Required: Compute the overall increase or decrease in Kennaman's net operating income if Store I is closed.

Answer 1