CMA Study Group

  • 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
    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)].


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    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
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