Marshal Costumes Owns Two Stores and Management Is Considering Eliminating

question 9

Multiple Choice

Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales. Common fixed costs are allocated on the basis of sales. Contribution income statements are as follows: $\begin{array}{lrrr}&\text { Arlington }&\underline{\text { Mandarin }} &\underline{\text { Total }}\\\text { Sales } & \$ 300,000 & \$ 200,000 & \$ 500,000 \\\text { Variable costs } & 160,000 & 130,000 & 290,000 \\\text { Direct fixed costs } & 40,000 & 20,000 & 60,000 \\\text { Allocated fixed costs } & \underline{80,000} & \underline{65,000} & \underline{145,000} \\\text { Net Income } & \underline{\$ 20,000} & \underline{\$(15,000) } & \underline{\$ 5,000}\end{array}$ Marshal's management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%. If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?

• A) Increase by $17,000
• B) Decrease by $36,000
• C) Increase by $22,000
• D) Decrease by $20,000

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