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Connecticut Store Rhode Island Store Revenues $1,070,000 $ 860,000 Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) 750,000 660,000 90,000 75,000 42,000 42,000 25,000 22,000 43,000 46,000 Allocated corporate overhead Total operating costs 50,000 40,000 1,000,000 885,000 Operating income (loss) $ 70,000 $ (25,000) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, "Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it." 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corpo- rate overhead costs by $4,000. Is Maria Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain. Required

Connecticut Store Rhode Island Store Revenues $1,070,000 $ 860,000 Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) 750,000 660,000 90,000 75,000 42,000 42,000 25,000 22,000 43,000 46,000 Allocated corporate overhead Total operating costs 50,000 40,000 1,000,000 885,000 Operating income (loss) $ 70,000 $ (25,000) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, "Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it." 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corpo- rate overhead costs by $4,000. Is Maria Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain. Required

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Closing and opening stores. Sanchez Corporation runs two convenience stores, one in Connecticut and one in Rhode Island. Operating income for each store in 2017 is as follows:

Connecticut Store Rhode Island Store Revenues $1,070,000 $ 860,000 Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) 750,000 660,000 90,000 75,000 42,000 42,000 25,000 22,000 43,000 46,000 Allocated corporate overhead Total operating costs 50,000 40,000 1,000,000 885,000 Operating income (loss) $ 70,000 $ (25,000) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, "Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it." 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corpo- rate overhead costs by $4,000. Is Maria Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain. Required
Transcribed Image Text:Connecticut Store Rhode Island Store Revenues $1,070,000 $ 860,000 Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) 750,000 660,000 90,000 75,000 42,000 42,000 25,000 22,000 43,000 46,000 Allocated corporate overhead Total operating costs 50,000 40,000 1,000,000 885,000 Operating income (loss) $ 70,000 $ (25,000) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, "Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it." 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corpo- rate overhead costs by $4,000. Is Maria Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain. Required
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