Question

1. Depot District Proposal: Staff recommendation is that The Depot District store should be closed. The company is a consistent money loser. Below is a contribution margin income statement for the Depot District store for the past year. Half of the fixed expenses relate to the store’s rent under a 20 year non-cancelable lease. The lease costs cannot be avoided, and the location is not able to be subleased to another company. Perform a side by side comparison. On one side show the results of accepting the recommendation and on the other side show the rejection of the recommendation. Write up your approach to your analysis and your conclusion (your decision and why). Show all your work.

Depot District CM Income Statement

Sales Revenues $1,400,000

Variable Expenses 1,000,000

Contribution Margin 400,000

Fixed Expenses 650,000

Income (loss) $(250,000)

Answer 1

Depot District Proposal: Staff recommendation is that The Depot District store should be closed

*Half of the fixed expenses relate to the store’s rent under a 20 year non-cancelable lease. The lease costs cannot be avoided

.

Depot District CM Income Statement

Sales Revenues $1,400,000

Variable Expenses 1,000,000

Contribution Margin 400,000

Fixed Expenses 650,000

Income (loss) $(250,000)

.

To Drop or Not to Drop Analysis

	Accepting the recommendation	Rejection of the recommendation
Sales Revenues	$0	$1,400,000
Variable Expenses	0	1,000,000
Contribution Margin	0	400,000
Fixed Expenses*	325000	650,000
Income (loss)	$(325000)	$(250,000)

*If we accept the recommendation, Half of the fixed expenses can eliminate and half cannot eliminate, which is related to leas agreement. So half still exist, if close the operation.

.

Decision Making

**If we accept the recommendation, it will increase the loss by $75000 ( 325000 - 250000 ). They had better to continue the operation, which means rejection of recommendation.