Ring Incorporated's income statement for the most recent month is given below.$$\begin{array} { l l l l }
& \text { Total } & \text { Store } P & \text { Store } Q \
\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \
\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \
\text { Contribution margin } & 216,000 & 56,000 & 160,000 \
\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \
\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \
\text { Common fixed expenses } & \underline { 34,000 } & & \
\text { Net operating income } & \underline { £ 30,000 } & &
\end{array}$$
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For each of the following questions, refer back to the original data. If sales in Store Q increase by £30,000 as a result of a £7,000 increase in traceable fixed costs

A)Store Q's contribution margin should increase by £18,000.
B)Store Q's segment margin should increase by £12,000.
C)Store Q's contribution margin should increase by £11,000.
D)Store Q's segment margin should increase by £5,000.

Question

Ring Incorporated's income statement for the most recent month is given below.$$\begin{array} { l l l l } 
& \text { Total } & \text { Store } P & \text { Store } Q \
\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \
\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \
\text { Contribution margin } & 216,000 & 56,000 & 160,000 \
\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \
\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \
\text { Common fixed expenses } & \underline { 34,000 } & & \
\text { Net operating income } & \underline { £ 30,000 } & &
\end{array}$$
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For each of the following questions, refer back to the original data. If sales in Store Q increase by £30,000 as a result of a £7,000 increase in traceable fixed costs

A)Store Q's contribution margin should increase by £18,000.
B)Store Q's segment margin should increase by £12,000.
C)Store Q's contribution margin should increase by £11,000.
D)Store Q's segment margin should increase by £5,000.

Quizplus · Accepted Answer

Since the increase in sales of £30,000 results in an increase in traceable fixed costs of £7,000, the contribution margin will only increase by the contribution margin ratio of Store Q (i.e. the proportion of each sale that contributes to covering fixed costs and generating profit), which is 0.4 (i.e. £400,000 ÷ £1,000,000). Therefore, the contribution margin increase will be £30,000 x 0.4 = £12,000. 
However, this increase only affects Store Q's segment margin, which is the contribution margin minus traceable fixed costs. Therefore, Store Q's segment margin should increase by £12,000 - £7,000 = £5,000. Hence, the best choice is D.

Ring Incorporated's Income Statement for the Most Recent Month Is