O'Neill, Incorporated's segmented income statement for the most recent month is given below. For each of the following questions, refer back to the above original data. A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in Store A's traceable fixed expenses of $8,000. If this proposal is implemented and sales remain constant, overall company net operating income should:
A)remain the same
B)decrease by $4,200
C)increase by $2,000
D)increase by $8,000

Question

O'Neill, Incorporated's segmented income statement for the most recent month is given below.  For each of the following questions, refer back to the above original data. A proposal has been made that will lower variable expenses in Store A to 62% of sales. However, this reduction can only be accomplished by an increase in Store A's traceable fixed expenses of $8,000. If this proposal is implemented and sales remain constant, overall company net operating income should:
A)remain the same 
B)decrease by $4,200 
C)increase by $2,000 
D)increase by $8,000

Quizplus · Accepted Answer

Currently, Store A has sales of $80,000 and variable expenses of $50,000, which results in a contribution margin of $30,000. If variable expenses are reduced to 62% of sales, then variable expenses would be 0.62 x $80,000 = $49,600. Subtracting this from sales gives a contribution margin of $80,000 - $49,600 = $30,400.

However, with the increase in traceable fixed expenses of $8,000, Store A's net operating income would be $30,400 - $12,000 - $9,000 - $8,000 = $1,400.

Looking at the segmented income statement, overall company net operating income would increase from $9,600 to $11,600 ($1,400 increase in Store A's net operating income and no changes in the other store's net operating income). Therefore, the answer is C.

O'Neill, Incorporated's Segmented Income Statement for the Most Recent Month