what do they mean by sales are at variable cost??
can someone explain this question.?
Fact Pattern: Condensed monthly operating income data for Korbin, Inc., for May follows :
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Urban
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Suburban
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Store
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Store
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Total
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Sales
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$80,000
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$120,000
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$200,000
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Variable costs
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32,000
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84,000
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116,000
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Contribution margin
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$48,000
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$ 36,000
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$ 84,000
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Direct fixed costs
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20,000
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40,000
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60,000
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Store segment margin
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$28,000
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$ (4,000)
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$ 24,000
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Common fixed cost
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4,000
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6,000
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10,000
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Operating income
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$24,000
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$ (10,000)
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$ 14,000
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Additional information regarding Korbin's operations follows :
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One-fourth of each store's direct fixed costs would continue if either store is closed.
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Korbin allocates common fixed costs to each store on the basis of sales dollars.
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•
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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.
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•
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The operating results for May are representative of all months.
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Question: 4 |
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 |
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Answer (D) 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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