Question

East Meets West Ltd. operates two stores, one in Victoria and another in Halifax. The following income statements were prepared for the most recent year

The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty.

Required

a. Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered?

b. Should management close the Halifax store? Assume that corporate overhead would be fixed costs are to be covered?

						Victoria	Halifax
Net Sales						3780000	960000
Variable costs:
Cost of goods sold						1512000	528000
Sales commission						189000	48000
Utilities						17200	15300
Contribution margin						2061800	368700
Fixed costs:
Annual building lease						84000	39000
Salaries						380000	180000
Allocated corporate overhead						750000	250000
Amortization of store equipment & Leasehold improvements						60000	30000
Operating income (loss)						787800	-130300

Answer 1

a. Break-even dollar sales = Total fixed cost to be covered / Contribution Margin Ratio

	Victoria Store	Halifax Store
Fixed Costs	$ 1,274,000	$ 499,000
Contribution Margin Ratio ( Contribution Margin / Sales )	54.54 %	38.41 %
Break-even dollar sales	$ 2,335,900	$ 1,299,141

b.

Contribution lost by closing Halifax Store	$ ( 368,700)
Fixed costs that can be avoided ( annual building lease + salaries)	219,000
Net Advantage ( Disadvantage) of closing the Halifax Store	$ (149,700)

Closing the Halifax Store would lead to a decrease in net operating income by $ 149,700. Therefore it should not be closed, as the contribution towards corporate overhead would be lost.