Evaluating Decision Alternatives Involving Common Costs

Essay

Evaluating Decision Alternatives Involving Common Costs
Cosmo Inc.operates two retail novelty stores:the Mall Store and the Town Store.Condensed monthly operating income data for Cosmo Inc.for November are presented in the accompanying table.Additional information regarding Cosmo's operations follows the statement.
• One-fourth of each store's direct fixed expenses would continue through December of next year if either store were closed.
• Cosmo allocates common fixed expenses to each store on the basis of sales dollars.
• Management estimates that closing the Town Store would result in a 10 percent decrease in Mall Store sales,while closing the Mall Store would not affect Town Store sales.
• The operating results for November are representative of all months.
Required:
a.A decision by Cosmo Inc.to close the Town Store would result in a monthly increase (decrease)in Cosmo's operating income during next year of how much?
b.Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store.Increasing monthly promotional expenses at the Town Store by $5,000 in order to increase Town Store sales by 10 percent would result in a monthly increase (decrease)in Cosmo's operating income during next year of how much?
c.Half of Town Store's dollar sales are from items sold at variable cost to attract customers to the store.Cosmo is considering deleting these items,a move that would reduce the Town Store's direct fixed expenses by 15 percent and result in the loss of 20 percent of Town Store's remaining sales volume.This change would not affect the Mall Store.A decision to eliminate the items sold at cost would result in a monthly increase (decrease)in Cosmo's operating income during next year of how much?