Condensed monthly operating income data for Korbin, Inc. for May 31, Year 1, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, Year 1
Urban Store Suburban Store Total
Sales $80,000 $120,000 $200,000
VC
32,000 84,000 116,000
CM & ;nbs p; 48,000 36,000 84,000
Direct FC 20,000 40,000 60,000
segment margin 28,000 (4,000) 24,000
Common FC 4,000 6,000 10,000
Operating Inc $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 ten percent 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 Year 1 are representative of all months.
Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this store's sales by ten percent would result in a monthly increase (decrease) in Korbin's operating income during Year 2 (rounded) of:
a. (1,400)
b. 487
c. 7,000
d. 12,000
Per Beckers explaination:
Choice "a" is correct. $(1,400).
10% increase in contribution margin:
$36,000 x
10% = $ 3,600
Promotional expense for one month:
$60,000 annual expense x
1/12 = (5,000)
Decrease in operating income $(1,400)
Choices "b", "c", and "d" are incorrect, per the above explanation.
I'm consfused as to why the % change in operating income is calculated on an annual basis and is added to the monthly change in promotional expenses???? Any insight would be greatly appreciated!! Thanks!
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Topic: Becker Quest - Cost accting & budgeting
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