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Assumefurtherthatthetotalassetsinvested

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Unformatted text preview: rtments Total Groceries General merchandise Drugs Sales $1,900 $1,000 $800 $100 Sales $1,900 $1,000 $800 $100 Variable expenses 1,420 800 560 60 Variable expenses 1,420 800 560 60 Contribution margin $ 480 (25%) $200 (20%) $240 (30%) $40 (40%) Contribution margin $ 480 (25%) $200 (20%) $240 (30%) $40 (40%) Fixed expenses: Fixed expenses: Avoidable $ 265 $ 150 $100 $ 15 Avoidable $ 265 $ 150 $100 $ 15 Unavoidable 180 60 100 20 Unavoidable 180 60 100 20 Total fixed expenses $ 445 $ 210 $ 200 $ 35 Total fixed expenses $ 445 $ 210 $ 200 $ 35 Operating income $ 35 $ (10) $ 40 $ 5 Operating income $ 35 $ (10) $ 40 $ 5 ($000) Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Department Store Example Assume that the only alternatives to be considered are 1) dropping or 2) continuing the grocery department, which has consistently shown an operating loss. Assume further that the total assets invested would be unaffected by the decision. The vacated space would be idle and the unavoidable costs would continue. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Department Store Example after dropping Groceries Store as a Whole ($000) Total Before Change Sales Variable expenses Contribution margin Avoidable fixed expenses Profit contribution to common space and other unavoidable costs Unavoidable expenses Operating income Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Effect of Dropping Groceries $1,900 $1,000 1,420 800 $ 480 $ 200 265 150 $ 215 180 $ 35 $ 50 0 $ 50 Total After Change $900 620 $280 115 $165 180 $ (15) It is shown from the analysis that dropping It groceries results in loss of $15,000 for the loss company as a whole. You can see that groceries bring in a contribution margin of $200,000 which is $50,000 more than the $150,000 fixed expenses, that the store would save by keeping the grocery department. In addition, dropping the groceries department leaves facilities idle. leaves Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Department Store Example Assume now that the store could use the space made available by the dropping of groceries to expand the general merchandise department. And this space will increase sales by $500,000, generate a 30% contribution­margin, ( and Variable expense = 70% of $500,000 = 350,000) 70% of $500,000 = 350,000) and have avoidable fixed costs of $70,000. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Department Store Example Store as a Whole ($000) Total Total Expand After Before Drop General Change Groceries Merchandise Change Sales $1,900 $1,000 $500 $1,400 Variable expenses 1,420 800 350 970 Contribution margin $ 480 $ 200 $150 $ 430 Avoidable fixed expenses 265 150 70 185 Profit contribution to common space and other unavoidable costs $ 215 $ 50 $80 $245 Unavoidable expenses 180 0 0 180 Operating income $ 35 $ 50 $80 $ 65 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh The $80,000 increase in operating income of The general merchandise more than offsets the $50,000 decline from eliminating groceries, providing overall increase in operatin...
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