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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 | 750,000 | 660,000 |
Lease rent (renewable each year) | 90,000 | 75,000 |
Labor costs (paid on an hourly basis) | 42,000 | 42,000 |
|
25,000 | 22,000 |
Utilities (electricity, heating) | 43,000 | 46,000 |
Allocated corporate |
50,000 | 40,000 |
Total operating costs | 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
- 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.
Required
- 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 corporate overhead costs by $4,000. Is Maria Lopez’s statement about the effect of adding another store like the Rhode Island store correct? Explain.
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