Lessing Toy and Hobby (LTH) is a chain of hobby and craft stores in the Southeast. LTH operates multiple stores and is organized into two divisions: Northern and Southern. Individual stores are placed in one or the other division based on geography. Recent demographic changes in the Northern Division area have led to declining foot traffic and sales in the LTH stores. Senior corporate executives have been asking whether the chain should close those stores and focus on the stores in the Southern Division. The most recent income statement for the Northern Division follows. Lessing Toy and Hobby Northern Division For the Year Ending January 31 ($000) Sales revenue $ 13,840 Costs Cost of goods sold $ 7,820 Advertising 508 Administrative salaries 828 Sales commissions 1,642 Rent and occupancy expense 2,076 Allocated corporate support 1,348 Total costs $ 14,222 Net loss before tax benefit $ (382) Tax benefit at 25% (95.50) Net loss $ (286.50) The CEO has asked for your thoughts on the decision to close the Northern Division stores. If the Northern Division is eliminated and the stores closed, neither total corporate support costs nor operations or costs of the Southern Division stores are expected to change. Required: Using the worksheet below, determine which revenues and costs are probably differential or not differential for the decision to close the Northern Division stores. What will be the effect on LTH’s income if the Northern Division stores are closed?

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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Lessing Toy and Hobby (LTH) is a chain of hobby and craft stores in the Southeast. LTH operates multiple stores and is organized into two divisions: Northern and Southern. Individual stores are placed in one or the other division based on geography. Recent demographic changes in the Northern Division area have led to declining foot traffic and sales in the LTH stores. Senior corporate executives have been asking whether the chain should close those stores and focus on the stores in the Southern Division. The most recent income statement for the Northern Division follows.

Lessing Toy and Hobby
Northern Division
For the Year Ending January 31
($000)
Sales revenue	$ 13,840
Costs
Cost of goods sold	$ 7,820
Advertising	508
Administrative salaries	828
Sales commissions	1,642
Rent and occupancy expense	2,076
Allocated corporate support	1,348
Total costs	$ 14,222
Net loss before tax benefit	$ (382)
Tax benefit at 25%	(95.50)
Net loss	$ (286.50)

The CEO has asked for your thoughts on the decision to close the Northern Division stores. If the Northern Division is eliminated and the stores closed, neither total corporate support costs nor operations or costs of the Southern Division stores are expected to change.

Required:

Using the worksheet below, determine which revenues and costs are probably differential or not differential for the decision to close the Northern Division stores.
What will be the effect on LTH’s income if the Northern Division stores are closed?

a. Using the worksheet below, determine which revenues and costs are probably differential or not differential for the decision to
close the Northern Division stores.
b. What will be the effect on LTH's income if the Northern Division stores are closed?
Complete this question by entering your answers in the tabs below.
Required A Required B
What will be the effect on LTH's income if the Northern Division stores are closed?
LTH's profits will decrease
by
< Required A
Required B >

Note: Enter you answer in whole dollars, not in thousands e.g., 10,000 should be entered as 10,000,000.
Lessing Toy and Hobby
Northern Division Income Statement
Differential Revenues and Costs
For the Year Ending January 31
Sales revenue
Costs
Cost of goods sold
Advertising
Administrative salaries
Sales commissions
Rent and occupancy expense
Allocated corporate support
Total differential costs
Net differential loss before income tax
Tax benefit at 25% rate
Net differential loss from division
$
< Required A
0
Differential
Differential
Not differential
Differential
Differential
Differential
Not differential
Differential
Required B >

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