Question

Create a solution to the following problem:

Homework Problem

Week Five

Sunshine Oil Company operates two gas stations, one in Missouri, and one in Illinois. Financial data for these two stores is listed below:

Missouri Illinois

Revenue $1,070,000 $860,000

Operating Costs

Cost of Good Sold 750,000 660,000

Lease Rent 90,000 75,000

Labor Costs 42,000 42,000

Depreciation 25,000 22,000

Utilities 43,000 46,000

Corporate Overhead 50,000 40,000

Total Operating Costs $1,000,000 $885,000

Operating Income or Loss $70,000 $(25,000)

The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant made the comment that Sunshine Oil Co. needed to increase its profitability by closing down the Illinois Store OR by adding another store like it in another location.

Compute the overall operating income or loss if Sunshine decides to close the Illinios store.

Compute the overall operating income or loss is Sunshine decides to keep both MO and IL stores and also open another store very similar to the Illinios store.

Answer 1

Solution to the above question:-

Case (a):- Calculation of the overall operating income or loss if Sunshine decides to close the Illinios store-

Operations	Continued (a)	Shut down (b)	Total (c=a+b)
Income Statement	Missouri- Amount($)	Illinois- Amount($)	Amount($)	Reason to include few expense of Illinois
Revenue	1,070,000		1,070,000
Cost of Good Sold	750,000		750,000
Lease Rent	90,000	75,000	165,000	Fixed cost, cannot be avoided
Labor Costs	42,000		42,000
Depreciation	25,000	22,000	47,000	Fixed cost, cannot be avoided
Utilities	43,000		43,000
Corporate Overhead	50,000		50,000
Total Operating Costs	1,000,000	97,000	1,097,000
Operating Income	70,000	(97,000)	(27,000)

The overall operating loss if Sunshine decides to close the Illinios store will be $27,000. (answer)

Case (b)- Calculation of the overall operating income or loss is Sunshine decides to keep both MO and IL stores and also open another store very similar to the Illinios store-

Operations	Continued(a)	Continued(b)	New store (c)	Total(d=a+b+c)
Income Statement	Missouri- Amount($)	Illinois- Amount($)	Similar to IL- Amount($)	Amount($)
Revenue	1,070,000	860,000	860,000	2,790,000
				-
Cost of Good Sold	750,000	660,000	660,000	2,070,000
Lease Rent	90,000	75,000	75,000	240,000
Labor Costs	42,000	42,000	42,000	126,000
Depreciation	25,000	22,000	22,000	69,000
Utilities	43,000	46,000	46,000	135,000
Corporate Overhead	50,000	40,000	40,000	130,000
Total Operating Costs	1,000,000	885,000	885,000	2,770,000
			-	-
Operating Income	70,000	(25,000)	(25,000)	20,000

The overall operating income if Sunshine decides to keep both MO and IL stores and also open another store very similar to the Illinios store is $20,000.(answer)