Reference no: EM132591065

Eastern Clothing has two locations.

The most recent income statement is as follows: (in $millions)

                                 Florida                Chicago                    Total

Sales                        40                     10                     50

Variable Costs               22                    3                      25

Contribution Margin          18                   7                    25

Fixed Costs (note 1)          12                    12                24

Operating Income                6                      (5)                 1

Note 1: Fixed costs for Chicago include $3 in depreciation for equipment - The equipment has no disposal value. Fixed costs include $8 in corporate costs (allocated as $4 to each store).

Eastern is considering closing its Chicago store. If Chicago is closed, the following will likely occur:

A. Sales at Florida will increase by 10%

B. Overall corporate costs will be reduced from $8 to $6

C. Florida will have to rent more space - this will increase rent from $3 to $4 per year

Required:

Question 1: Compute net income if Eastern Stores closes the Chicago location.