CMA Study Group

Hello Nitesh,

Hope you are doing well with Decision analysis.

This Korbin case study has been discussed before. For better illustration & understanding I will rearrange all additional information as follows:

1. One-fourth of each store's direct fixed costs would continue if either store is closed.
2. Korbin allocates common fixed costs to each store on the basis of sales dollars.
3. 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.
4. The operating results for May are representative of all months.
5. One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store.
6. 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.
7. This change would not affect the Urban store.

Previous question was about closing Suburban store. Additional information from 1 to 4 only.  (This page:  Korbin case 1 )
Now we have much trickier request which is related to additional information from 5 to 7 only.

- The key solution in this case study is based on Contribution Margin concept, which is essentially used for marginal analysis decision making.
- The main trick here is that Suburban Store's items sold at variable cost have (0) Contribution Margin included in $36,000. So, we don't know how much sales Dollars are those items, despite the given "Misleading" information of One-Half >>> Additional info No.5 is irrelevant to decision making
- Decision making is based on additional info included in point (6) only as follows:

• Suburban's reduced direct fixed cost = $40,000 x 15% = $6,000 (Irrelevant cost 85% = $34,000)
• Suburban's Variable cost % = $84,000 / $120,000 = 70%
• Loss of Suburban Store's remaining sales volume = $120,000 x 20% = $24,000
• Variable cost of deleted items = $24,000 X 70% = $16,800
• (Alternative direct calculation: Loss = Contribution Margin x 20% = $36,000 x 20% = $7,200)
• Korbin's decision net result = Cost savings - Lost revenue = $6,000 - $7,200 = ($1,200)

Gentle reminders:
- Always look at the impact on Contribution Margin, because Marginal Analysis is based on the concept of Incremental Revenues Vs Incremental Costs.
- Many of exam support package MCQs have a long story like what is presented here, while solution is generated by simple calculation of CM in two steps only.- Some case studies have up-normal "Misleading" assumptions like point (5), since it is mentioned One-Half of "Dollar" sales, while later in point (6) mentioned 20% loss of remaining sales "Volume" ..!!!!

Please find the attached file for better illustration.

Kind regards

------------------------------
Samer Ahmad, FMVA, SCA
Kuwait
------------------------------

Original Message:
Sent: 05-26-2020 02:59 PM
From: Nitesh Anchan
Subject: Section C Question Solve

Please help to solve this question

Condensed monthly operating income data for Korbin Inc. for May follows:

                 Urban Store Suburban 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 were 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.
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

Regards,

Nitesh Anchan

​Hi Kuwait,

Thanks for sharing!
The result I got is the same with yours. I would like to present my calculations.

• Loss of Suburban Store's remaining sales volume = $120,000 x 50% x 20% = $12,000
• Reduction of variable cost of remaining sales = ($84,000 - $120,000 x 50%) x 20% = $4,800
• Suburban's reduced direct fixed cost = $40,000 x 15% = $6,000
• Korbin's decision net result = Cost savings - Lost revenue = ($6,000+$4,800) - $12,000 = ($1,200)

          There is no impact on Korbin's operating income from the items sold at variable cost. 
 


------------------------------
[Christine]
[Manager]
[DongGuan]
[China]
------------------------------

Original Message:
Sent: 05-27-2020 07:05 AM
From: Samer Ahmad
Subject: Section C Question Solve

Hello Nitesh,

Hope you are doing well with Decision analysis.

This Korbin case study has been discussed before. For better illustration & understanding I will rearrange all additional information as follows:

1. One-fourth of each store's direct fixed costs would continue if either store is closed.
2. Korbin allocates common fixed costs to each store on the basis of sales dollars.
3. 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.
4. The operating results for May are representative of all months.
5. One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store.
6. 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.
7. This change would not affect the Urban store.

Previous question was about closing Suburban store. Additional information from 1 to 4 only.  (This page:  Korbin case 1 )
Now we have much trickier request which is related to additional information from 5 to 7 only.

- The key solution in this case study is based on Contribution Margin concept, which is essentially used for marginal analysis decision making.
- The main trick here is that Suburban Store's items sold at variable cost have (0) Contribution Margin included in $36,000. So, we don't know how much sales Dollars are those items, despite the given "Misleading" information of One-Half >>> Additional info No.5 is irrelevant to decision making
- Decision making is based on additional info included in point (6) only as follows:

• Suburban's reduced direct fixed cost = $40,000 x 15% = $6,000 (Irrelevant cost 85% = $34,000)
• Suburban's Variable cost % = $84,000 / $120,000 = 70%
• Loss of Suburban Store's remaining sales volume = $120,000 x 20% = $24,000
• Variable cost of deleted items = $24,000 X 70% = $16,800
• (Alternative direct calculation: Loss = Contribution Margin x 20% = $36,000 x 20% = $7,200)
• Korbin's decision net result = Cost savings - Lost revenue = $6,000 - $7,200 = ($1,200)

Gentle reminders:
- Always look at the impact on Contribution Margin, because Marginal Analysis is based on the concept of Incremental Revenues Vs Incremental Costs.
- Many of exam support package MCQs have a long story like what is presented here, while solution is generated by simple calculation of CM in two steps only.- Some case studies have up-normal "Misleading" assumptions like point (5), since it is mentioned One-Half of "Dollar" sales, while later in point (6) mentioned 20% loss of remaining sales "Volume" ..!!!!

Please find the attached file for better illustration.

Kind regards

------------------------------
Samer Ahmad, FMVA, SCA
Kuwait

Original Message:
Sent: 05-26-2020 02:59 PM
From: Nitesh Anchan
Subject: Section C Question Solve

Please help to solve this question

Condensed monthly operating income data for Korbin Inc. for May follows:

                 Urban Store Suburban 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 were 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.
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

Regards,

Nitesh Anchan