Reference no: EM132528728

Central Apparel Company owns three stores and management is considering eliminating the east store due to declining sales. Contribution income statements are as follows and common fixed costs are allocated on the basis of sales (amounts in thousands).

                                    South                   West             East              Total

Sales                  $1,800                 $4,200           $900         $6,900

Variable costs        900                    2,100            450           3,450

Direct fixed cost    300                      500                250       1,050

Allocated fixed cost 450                    1,050              225        1,725

Net Income              $150                    $550           ($25)          $675

Central's management feels that if they eliminate the east store, sales in the west store will increase by 20%. Sales in the south store will be unaffected.

Question 1: Prepare new income statements in the format below assuming the elimination of the east store.

Question 2: Should Central eliminate the east store? Why or why not?

South West Total

Sales

Variable costs

Direct fixed costs

Allocated fixed costs

Net Income