Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement.
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 ten percent 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.
1. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income of:
A. $4,000
B. $(10,800)
C. $(800)
D. $(6,000)
2. Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease) in Cosmo's operating income of:
A. $(16,800)
B. $3,400
C. $7,000
D. $(1,400)