If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?
Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales. Common fixed costs are allocated on the basis of sales. Contribution income statements are as follows:
Arlington Mandarin Total
Sales $300,000 $200,000 $500,000
Variable costs 160,000 130,000 290,000
Direct fixed costs 40,000 20,000 60,000
Allocated fixed costs 80,000 65,000 145,000
Net Income $ 20,000 $ (15,000) $ 5,000
Marshal’s management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%. If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes?
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