Reference no: EM132521356

Shown as follows is a segmented income statement for Drexel-Hall during the current month.

Profit Centers

                                      Drexel-Hall                          Store 1   Dollars %        Store 2     Dollars %            Store 3        Dollars %

Sales                               $1,800,000 100%             $600,000 100%               $600,000   100%                      $600,000 100 %

Variable costs                     1,080,000 60                      372,000 62                        378,000   63                     330,000   55

Contribution margin                   $720,000 40%             $228,000 38%                    $222,000 37%                   $270,000   45%

Traceable fixed costs:

controllable                             432,000     24               120,000   20                       102,000   17                     210,000    35

Performance margin               $288,000    16%               $108,000   18%                 $120,000    20%                  $60,000  10%

Traceable fixed costs:

committed                           180,000          10                 48,000     8                     66,000      11                    66,000      11

Store responsibility margin       $108,000          6%             $60,000   10%                     $54,000   9%              $(6,000)    (1)%

Common fixed costs                   36,000 2

Income from operations             $72,000 4%

• All stores are similar in size, carry similar products, and operate in similar neighborhoods. Store 1 was established first and was built at a lower cost than were Stores 2 and 3. This lower cost results in less depreciation expense for Store 1. Store 2 follows a policy of minimizing both costs and sales prices. Store 3 follows a policy of providing extensive customer service and charges slightly higher prices than the other two stores.

• The marketing manager of Drexel-Hall is considering two alternative advertising strategies, each of which would cost $15,000 per month. One strategy is to advertise the name Drexel-Hall, which is expected to increase the monthly sales at all stores by 5 percent. The other strategy is to emphasize the low prices available at Store 2, which is expected to increase monthly sales at Store 2 by $150,000, but to reduce sales by $30,000 per month at Stores 1 and 3.

Question 1: Determine the expected effect of each strategy on the company's overall income from operations.