Q5: Divya, an entrepreneur runs two ice cream stores, one in Gurgaon and the other in Noida. Operating income for each store in 2017 is as follows: Gurgaon Store (INR) | 1,07,00,000 Noida Store (INR) 86,00,000 Revenues Operating costs: |Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity heating) Allocated corporate overhead Total operating costs Operating income (loss) 75,00,000 9,00,000 4,20,000 2,50,000 4,30,000 5,00,000 1,00,00,000 7,00,000 66,00,000 7,50,000 4,20,000 2,20,000 4,60,000 4,00,000 88,50,000 (2,50,000) The equipment has a zero-disposal value. Varun, the accountant makes the following comment, 'Divya can increase her profitability by closing down the Noida store or by adding another store like it'. Required: i. By closing down the Noida store, Divya can reduce overall corporate overhead costs by INR 4,40,000. Calculate Divya's operating income if she closes the Noida store. Is Varun's statement about the effect of closing the Noida store correct? Explain. ii. Calculate Divya's operating income if she keeps the Noida store open and opens another store with revenues and costs identical to the Noida store (including a cost of INR 2,20,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by INR 40,000. Is Varun's statement about the effect of adding another store like the Noida store correct? Explain.
Q5: Divya, an entrepreneur runs two ice cream stores, one in Gurgaon and the other in Noida. Operating income for each store in 2017 is as follows: Gurgaon Store (INR) | 1,07,00,000 Noida Store (INR) 86,00,000 Revenues Operating costs: |Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity heating) Allocated corporate overhead Total operating costs Operating income (loss) 75,00,000 9,00,000 4,20,000 2,50,000 4,30,000 5,00,000 1,00,00,000 7,00,000 66,00,000 7,50,000 4,20,000 2,20,000 4,60,000 4,00,000 88,50,000 (2,50,000) The equipment has a zero-disposal value. Varun, the accountant makes the following comment, 'Divya can increase her profitability by closing down the Noida store or by adding another store like it'. Required: i. By closing down the Noida store, Divya can reduce overall corporate overhead costs by INR 4,40,000. Calculate Divya's operating income if she closes the Noida store. Is Varun's statement about the effect of closing the Noida store correct? Explain. ii. Calculate Divya's operating income if she keeps the Noida store open and opens another store with revenues and costs identical to the Noida store (including a cost of INR 2,20,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by INR 40,000. Is Varun's statement about the effect of adding another store like the Noida store correct? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Q5: Divya, an entrepreneur runs two ice cream stores, one in Gurgaon and the other in
Noida. Operating income for each store in 2017 is as follows:
Noida Store (INR)
86,00,000
Gurgaon Store (INR)
Revenues
1,07,00,000
Operating costs:
Cost of goods sold
Lease rent (renewable each year)
Labor costs (paid on an hourly basis)
Depreciation of equipment
Utilities (electricity heating)
Allocated corporate overhead
Total operating costs
Operating income (loss)
75,00,000
66,00,000
7,50,000
4,20,000
2,20,000
4,60,000
9,00,000
4,20,000
2,50,000
4,30,000
5,00,000
1,00,00,000
7,00,000
4,00,000
88,50,000
(2,50,000)
The equipment has a zero-disposal value. Varun, the accountant makes the following
comment, 'Divya can increase her profitability by closing down the Noida store or by adding
another store like it'.
Required:
i. By closing down the Noida store, Divya can reduce overall corporate overhead costs
by INR 4,40,000. Calculate Divya's operating income if she closes the Noida store. Is
Varun's statement about the effect of closing the Noida store correct? Explain.
ii. Calculate Divya's operating income if she keeps the Noida store open and opens
another store with revenues and costs identical to the Noida store (including a cost of
INR 2,20,000 to acquire equipment with a one-year useful life and zero disposal value).
Opening this store will increase corporate overhead costs by INR 40,000. Is Varun's
statement about the effect of adding another store like the Noida store correct?
Explain.
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