Question

E11-30 (similar to) Question Help * Sanchez Corporatian runs twa convenience stores, one in Connecticut and ane in Rhode Island. Operating income for each store in 2017 is as follows (Click the icon to view the add-or-drop segments infarmaticn.) Read the requirements EEE (Click to view the operating income for the stores.) Requirement 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $43,000. Calculate Sanchez's operating inoome if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. Begin by calculating Sanchez's operating income if it closes the Rhode Island store. (Complete all answer boxes. Enter losses in reven loss enter the amount with parentheses or a minus sign.) Data Table (Loss in Revenues) Savings in Costs Connecticut Store Rhode Island Store 1,100,000 S 870.000 Operating costs ng costs Cost of goods sold Cost of goods sold 725,000 00.000 Lease rent (renewable each year) 74,000 Lease rent (renewable each year) 88,000 Labor costs (paid on an hourly basis) Labor costs (paid on an hourly basia) 14,000 10,000 Depreciation of equipment Depreciation of equipment 23,000 21.000 Utilities electricity, heating) Xtities (electricity, heatng) 43,000 Requirements 52.000 52,000 10,000 Allocated corporate overhead Total operating costs 975,000 927.000 Total operating costs 1. By closing down the Rhode lsland store, Sanchez can reduce overall corporate overhead costs by $43,000. Calculate Sanchez's operating income if it closes the Rhode laland store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correc:? Explain. Eflect on operating income (loss) 125,000 S 57,000 perating income (loss) Print Done 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 lsland store (including s cost of $21,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $6,000. ls Maris Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain. Enter any number in the edit fields parts remaining Check Answer

Answer 1

Ques 1
	(Loss in revenues)
	Savings in costs
Revenues	$                         (870,000)
Operating Costs
Cost of Goods Sold	$                            700,000
Lease rent (renewable each year)	$                              74,000
Labor costs (paid on an hourly basis)	$                              40,000
Equipment depreciation	$                                       -
Utilities (electricity, heating)	$                              52,000
Allocated corporate overhead	$                              43,000
Total operating costs	$                            909,000
Operating Income	$                              39,000
Yes correct decision due to incremental profits
depreciation is an irrelevant cost, this is because the equipment has already been purchased
Ques 2
	Incremental Revenues
	(Incremental costs)
Revenues	$                            870,000
Operating Costs
Cost of Goods Sold	$                         (700,000)
Lease rent (renewable each year)	$                            (74,000)
Labor costs (paid on an hourly basis)	$                            (40,000)
Equipment depreciation	$                            (21,000)
Utilities (electricity, heating)	$                            (52,000)
Allocated corporate overhead	$                              (6,000)
Total operating costs	$                         (893,000)
Operating Income	$                            (23,000)
no the new division is incurring losses
If the incremental revenues exceed the incremental costs, Lopez is correct about the effect of adding an additional store. If the incremental revenues do not exceed the incremental costs, Lopez is not correct.