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?Select answer from the options belowThere will be no change in the Operating Income of the storesThe 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 $25,000The 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.

First, let's calculate the current operating income for each store.

Operating income is calculated as Sales - Variable Costs - Direct Fixed Costs - Allocated Fixed Costs.

For the Los Angeles store: Operating income = $500,000 -$150,000 - $75,000 -$25,000 = $250,000

For the Cleveland store: Operating income = $50,000 -$15,000 - $7,500 -$25,000 = $2,500

Next, let's calculate the proportion of sales for each store.

The total sales for both stores is $500,000 (LA) +$50,000 (Cleveland) = $550,000

The proportion of sales for the LA store is $500,000 /$550,000 = 0.9091 (or 90.91%) The proportion of sales for the Cleveland store is $50,000 /$550,000 = 0.0909 (or 9.09%)

If the allocated fixed costs from the head office were assigned proportionally to sales, the LA store would receive 90.91% of the $50,000, which is$45,455. The Cleveland store would receive 9.09% of the $50,000, which is$4,545.

The new operating income for the LA store would be $500,000 -$150,000 - $75,000 -$45,455 = $229,545 The new operating income for the Cleveland store would be$50,000 - $15,000 -$7,500 - $4,545 =$22,955

So, the correct answer is: The Operating Income from Los Angeles’ operating income will decrease from $250,000 to$229,545 and Cleveland store’s operating income will increase from $2,500 to$22,955. However, this option is not given in the choices. The closest option is "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."