Irving Corporation runs two stores, one in Medfield and one in Oakland. Operating income for each store in 2017 is as follows: Table shows the revenues, various operating costs, and operating income of Irving Corporation’s two stores, in Medfield and Oakland in the year 2017. The details of Medfield store are as follows: a. Revenues: $2,100,000 b. Operating costs • Cost of goods sold: $1,500,000 • Variable operating costs for labor and utilities: $180,000 • Lease rent renewable each year: $160,000 • Depreciation of equipment: $50,000 • Allocated corporate overhead: $90,000 • Total operating costs: $1,980,000 c. Operating income which is a loss: $120,000 The details of Oakland store are as follows: a. Revenues: $1,700,000 b. Operating costs • Cost of goods sold: $1,310,000 • Variable operating costs for labor and utilities: $170,000 • Lease rent renewable each year: $155,000 • Depreciation of equipment: $40,000 • Allocated corporate overhead: $75,000 • Total operating costs: $1,750,000 c. Operating income which is a loss: $50,000 within parentheses Medfield Store Oakland Store Revenues $2,100,000 $1,700,000 Operating costs  Cost of goods sold 1,500,000 1,310,000  Variable operating costs (labor, utilities) 180,000 170,000  Lease rent (renewable each year) 160,000 155,000  Depreciation of equipment 50,000 40,000  Allocated corporate overhead 90,000 75,000   Total operating costs 1,980,000 1,750,000 Operating income (loss) $ 120,000 $ (50,000) The equipment has zero disposal value. By closing down the Oakland store, Irving can reduce overall corporate overhead costs by $85,000. Should Irving Corporation close down the Oakland store? Instead of closing down the Oakland store, Irving Corporation is thinking of opening another store with revenues and costs identical to the Oakland store (including a cost of $40,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $10,000. Should Irving Corporation open another store like the Oakland store? Explain.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Irving Corporation runs two stores, one in Medfield and one in Oakland. Operating income for each store in 2017 is as follows:

Table shows the revenues, various operating costs, and operating income of Irving Corporation’s two stores, in Medfield and Oakland in the year 2017.
The details of Medfield store are as follows:

a. Revenues: $2,100,000

b. Operating costs

• Cost of goods sold: $1,500,000

• Variable operating costs for labor and utilities: $180,000

• Lease rent renewable each year: $160,000

Depreciation of equipment: $50,000

• Allocated corporate overhead: $90,000

• Total operating costs: $1,980,000

c. Operating income which is a loss: $120,000

The details of Oakland store are as follows:

a. Revenues: $1,700,000

b. Operating costs

• Cost of goods sold: $1,310,000

• Variable operating costs for labor and utilities: $170,000

• Lease rent renewable each year: $155,000

• Depreciation of equipment: $40,000

• Allocated corporate overhead: $75,000

• Total operating costs: $1,750,000

c. Operating income which is a loss: $50,000 within parentheses

Medfield Store Oakland Store
Revenues $2,100,000 $1,700,000
Operating costs
 Cost of goods sold 1,500,000 1,310,000
 Variable operating costs (labor, utilities) 180,000 170,000
 Lease rent (renewable each year) 160,000 155,000
 Depreciation of equipment 50,000 40,000
 Allocated corporate overhead 90,000 75,000
  Total operating costs 1,980,000 1,750,000
Operating income (loss) $ 120,000 $ (50,000)
The equipment has zero disposal value.

By closing down the Oakland store, Irving can reduce overall corporate overhead costs by $85,000. Should Irving Corporation close down the Oakland store?

Instead of closing down the Oakland store, Irving Corporation is thinking of opening another store with revenues and costs identical to the Oakland store (including a cost of $40,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $10,000. Should Irving Corporation open another store like the Oakland store? Explain.

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