Evaluate the kennaman''s net operating income

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Reference no: EM1314946

Decision on closure of one of the units with the help of decrease in net income.

The most recent monthly income statement for Kennaman Stores is given below:

	Total	Store I	Store II
Sales	$2,000,000	$1,200,000	$800,000
Less variable expenses	1,200,000	840,000	360,000
Contribution margin	800,000	360,000	440,000
Less traceable fixed expenses	400,000	220,000	180,000
Segment margin	400,000	140,000	260,000
Less common fixed expenses	300,000	180,000	120,000
Net operating income	$100,000	($40,000)	$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. (The decrease in sales would be the result of selling less units in store II, not due to reduced selling prices. In addition to sales, what other elements in the budget will be affected?) 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.

Reference no: EM1314946

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