Northern Stores Is a Retailer in British Columbia Northern Is Considering Closing Store I

Essay

Northern Stores is a retailer in British Columbia.The most recent monthly income statement for Northern Stores is given below:

$\begin{array}{ l r r r } & \text { Total } & \text { Store 1 } & \text { Store II } \\\text { Sales } & \$ 2,100,000 & \$ 1,300,000 & \$ 800,000 \\\text { Less variable expense } & \underline { 1,260,000 } & \underline { 882,000 } & \underline { 378,000 } \\\text { Contribution margin } & \$ 840,000 & \$ 418,000 & \$ 422,000 \\\text { Less traceable fixed expense } & \underline { 420,000 } & \underline { 231,000 } & \underline { 189,000 } \\\text { Segment margin } & \$ 420,000 & \$ 187,000 & \$ 233,000 \\\text { Less common fixed expenses } & \underline { 350,000 } & \underline { 210,000 } & \underline { 140,000 } \\\text { Operating Income } & \underline { \$ 70,000 } & \$ ( 23,000 ) & \$ 93,000\\\end{array}$

Northern is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue to be incurred. Also, the closing of Store I would result in a 20% decrease in sales in Store II. Northern allocates common fixed expenses on the basis of sales dollars and none of these costs would be saved if a store were shut down.

Required:

Compute the overall increase or decrease in the operating income of Northern Stores if Store I is closed.