# CMA Study Group

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## Decision Making

• #### 1.  Decision Making

Posted 8 days ago
can someone help me understand this question.

Fact Pattern:  Condensed monthly operating income data for Korbin, Inc., for May follows :
Urban
Suburban
Store
Store
Total
Sales
\$80,000
\$120,000
\$200,000
Variable costs
32,000
84,000
116,000
Contribution margin
\$48,000
\$  36,000
\$  84,000
Direct fixed costs
20,000
40,000
60,000
Store segment margin
\$28,000
\$   (4,000)
\$  24,000
Common fixed cost
4,000
6,000
10,000
Operating income
\$24,000
\$ (10,000)
\$  14,000
Additional information regarding Korbin's operations follows :  • One-fourth of each store's direct fixed costs would continue if either store is closed. • Korbin allocates common fixed costs to each store on the basis of sales dollars. • Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales. • The operating results for May are representative of all months.

Question: 38 One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store. Korbin is considering the deletion of these items, a move that would reduce the Suburban Store's direct fixed expenses by 15% and result in a 20% loss of Suburban Store's remaining sales volume. This change would not affect the Urban Store. A decision by Korbin to eliminate the items sold at cost would result in a monthly increase (decrease) in Korbin's operating income of
 A. \$(1,200) Answer (A) is correct.If 50% of the Suburban Store's sales are at variable cost, its contribution margin (sales – variable costs) must derive wholly from sales of other items. However, eliminating sales at variable cost reduces other sales by 20%. Thus, the effect is to reduce the contribution margin to \$28,800 (\$36,000 × .8). Moreover, fixed costs will be reduced by 15% to \$34,000 (\$40,000 × .85). Consequently, the new segment margin is \$(5,200) (\$34,000 direct fixed costs – \$28,800 contribution margin), a decrease of \$1,200 [\$(5,200) – \$(4,000)]. B. \$(5,200) C. \$(7,200) D. \$2,000

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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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