Question

Show belows is a segmented income statement for Drexel-Hall during the current month.

Profit Centers

Drexel-Hall Store 1 Store 2 Store 3

Dollars % Dollars % Dollars % Dollars %

Sales $1,800,000 100% $600,000 100% $600,000 100% $600,000 100%

Variable

costs 1,080,000 60 372,000 62 378,000 63 330,000 55

Contribution

margin $720,000 40% $228,000 38% $222,000 37% $270,000 45%

Traceable

fixed costs:

controllable 432,000 24 120,000 20 102,000 17 210,000 35

Performance

margin $288,000 16% $108,000 18% $120,000 20% $60,000 10%

Traceable

fixed costs:

committed 180,000 10 48,000 8 66,000 11 66,000 11

Store

responsibility

margin $108,000 6% $60,000 10% $54,000 9% $(6,000) (1)%

Common

fixed costs 36,000 2

Income

from

operations $72,000 4 %

All stores are similar in size, carry similar products, and operate in similar neighborhoods. Store 1 was established first and was built at a lower cost than were Stores 2 and 3. This lower cost results in less depreciation expense for Store 1. Store 2 follows a policy of minimizing both costs and sales prices. Store 3 follows a policy of providing extensive customer service and charges slightly higher prices than the other two stores.

Top management of Drexel-Hall is considering closing Store 3. The three stores are close enough together that management estimates closing Store 3 would cause sales at Store 1 to increase by $60,000, and sales at Store 2 to increase by $120,000. Closing Store 3 is not expected to cause any change in common fixed costs.A. Total monthly sales for Drexel-Hall stores.B. The monthly responsibility margin of Stores 1 and 2.C. The company.

Answer 1

To decide on closing a profit center, we compare revenues with variable costs to assess immediate profitability. Closing centers with revenues lower than variable costs seems rational unless fixed costs or other strategic considerations dictate otherwise.

Step-by-step explanation:

When evaluating the decision to close a profit center, it is essential to consider the impact on the company's overall profitability. If a center's revenues are less than its variable costs, it may be a candidate for closure as it's operating at a loss. For instance, if a center earns revenues of $10,000 and incurs variable costs of $15,000, the center would be operating at a loss and should consider shutting down, resulting in a negative profit margin. On the other hand, if a center earns $20,000 in revenue with the same $15,000 variable costs, it contributes positively to the company's overall profit and should continue operations.

However, the decision isn't solely based on variable costs. One must also factor in fixed costs and the potential incremental gains or losses from redirecting business if the center were shut down. For example, closing a store might decrease company-wide fixed costs or increase revenues at other locations. These factors can change the overall profitability calculation significantly.

Answer 2

The total monthly sales for Drexel-Hall stores is $3,600,000. The monthly responsibility margin of Stores 1 and 2 is $102,000 and $126,000 respectively. The company's income from operations is $186,000.

Step-by-step explanation:

The total monthly sales for Drexel-Hall stores can be calculated by adding up the sales of each store. In this case, the total monthly sales would be $1,800,000 + $600,000 + $600,000 + $600,000 = $3,600,000.

The monthly responsibility margin of Stores 1 and 2 can be calculated by subtracting the traceable fixed costs from the contribution margin for each store. For Store 1, the responsibility margin would be $222,000 - $120,000 = $102,000. For Store 2, the responsibility margin would be $228,000 - $102,000 = $126,000.

In this case, the income from operations would be $108,000 + $60,000 + $54,000 - $36,000 = $186,000.