Chapter 11, Problem 11.30E

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
Depreciation of equipment	25,000	22,000
Utilities (electricity, heating)	43,000	46,000
Allocated corporate overhead	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 management accountant at Sanchez Corporation, makes the following comment, “Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it.”

1. 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

1. 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.