Condensed Monthly Operating Income Data for Cosmo Inc Three-Quarters of Each Store's Traceable Fixed Expenses Are Avoidable If

question 139

Multiple Choice

Condensed monthly operating income data for Cosmo Inc.for November is presented below.Additional information regarding Cosmo's operations follows the statement:
$\begin{array}{|l|r|r|r|}\hline & &{\text { Mall }} &{\text { Town }} \\\hline & \text { Total } & \text { Store } & \text { Store } \\\hline \text { Sales } & \$ 200,000 & \$ 80,000 & \$ 120,000 \\\hline \text { Less: Variable Costs } & \$ 116,000 & \$ 32,000 & \$ 84,000 \\\hline \text { Contribution Margin } & \$ 84,000 & \$ 38,000 & \$ 36,000 \\\hline \text { Less: } \text { Traceable Fixed } & \$ 60,000 & \$ 20,000 & \$ 40,000 \\\text { Expenses }\\\hline \text { Store Segment Margin } & \$ 24,000 & \$ 28,000 & (\$ 4,000) \\\hline \text { Less: Common Fixed } & \$ 10,000 & \$ 4,000 & \$ 6,000 \\\text { Expenses }\\\hline \text { Operating Income (Loss) } & \$ 14,000 & \$ 24,000 & (\$ 10,000) \\\hline\end{array}$
Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be 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% 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.
A decision by Cosmo Inc.to close the Town Store would result in what monthly increase (decrease) in Cosmo's operating income?

• A) ($800).
• B) $4,000.
• C) ($6,000).
• D) ($10,800).

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Definitions:

Chi-Square

A statistical test used to determine if a significant relationship exists between two categorical variables in a contingency table.

Degrees of Freedom (df)

Number of values or quantities free to vary when a statistic is used to estimate a parameter.

Expected Frequency

In statistics, the frequency expected in a category of a contingency table under the assumption that the null hypothesis is true.

Chi-Square

A statistical test that measures the difference between observed and expected frequencies in categorical data.