$5\mathrm{.}5$ Fixed Costs and Decision$-$Making

A clothing company owns $2$ outlets, one in Los Angeles and one in Cleveland. The Los Angeles store sales are $$500,000,$ their variable

costs are $$150,000$ and their direct fixed costs are $$75,000.$ The Cleveland store sales are $$50,000,$ their variable costs are $$15,000$

and their direct fixed costs are $$7,500.$ The head office's incurred fixed costs of $$50,000$ that were assigned to each store as allocated

fixed costs of $$25,000$ each. What would be the effect on each store's operating income if the allocated fixed costs from the head

office were assigned proportionally to sales?

The Operating Income from Los Angeles' operating income will decrease from $$250,000$ to $$230,000$ and Cleveland store's

operating income will increase from $$2,500$ to $$22,500.$

There will be no change in the Operating Income of the stores

The allocated fixed costs will decrease both stores' operating income proportionally.

The operating income from Los Angeles' operating income will decrease from $$250,000$ to $$205,000$ and Cleveland store's

operating income will increase from $$2,500$ to $$25,000$