Answered: Lessing Toy and Hobby (LTH) is a chain…

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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Question

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	$ 12,140
Costs
Cost of goods sold	$ 6,120
Advertising	491
Administrative salaries	811
Sales commissions	1,625
Rent and occupancy expense	2,059
Allocated corporate support	1,331
Total costs	$ 12,437
Net loss before tax benefit	$ (297)
Tax benefit at 25%	(74.25)
Net loss	$ (222.75)

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?

Using the worksheet below, determine which revenues and costs are probably differential or not differential for the decision to
close the Northern Division stores.
Note: Enter you answer in whole dollars, not in thousands e.g., 10,000 should be entered as 10,000,000.
Sales revenue
Costs
Cost of goods sold
Advertising
Administrative salaries
Lessing Toy and Hobby
Northern Division Income Statement
Differential Revenues and Costs
For the Year Ending January 31
Sales commissions
Rent and occupancy expense
Allocated corporate support
Total differential costs
< Required A
Required B >

Required A Required B
What will be the effect on LTH's income if the Northern Division stores are closed?
LTH's profits will
by
< Required A
Required B >

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