Question

Charlotte Company runs two candy stores, one in Gastonia and one in Concord. Operating income for each store is as follows: Gastonia Store Concord Store Total Revenue $200,000 $120,000 $ 320,000 Operating costs: Cost of goods sold 75,000 60,000 135,000 Rent (renewable each year) 12,000 7,000 19,000 Hourly wages 35,000 26,000 61,000 Depreciation of equipment 10,000 10,000 20,000 Utilities 4,000 3,000 7,000 Allocated corporate overhead 30,000 20,000 50,000 Total operating costs 166,000 126,000 292,000 Operating income (loss) $34,000 ($6,000) $28,000 The company’s management is contemplating closing the Concord Store because it has been consistently reporting a loss. The equipment has a zero disposal value. By closing down the Concord Store, the company can reduce overall corporate overhead costs by $5,000. 5. What will be the effect on Charlotte Company’s operating income if the Concord Store is closed? A) increase by $19,000 B) increase by $6,000 C) decrease by $19,000 D) decrease by $6,000 6. Refer to the original data. For the next year, the company is considering keeping the Concord Store open and adding a new store in Pineville. The budgeted revenues and costs for the Pineville Store are identical to the revenues and costs of the Concord Store except for (a) no new equipment will be purchased, but instead equipment will be rented for $10,000 per year and (b) opening the Pineville Store will increase corporate overhead costs by $12,000. If the Pineville store is open, what will be the company’s budgeted operating income for next year? A) $22,000. B) $30,000. C) $37,000. D) $10,000.

Answer 1

	Original position
		Gastonia Store	Concord Store	Total
	Total Revenue	$200,000	$120,000	$320,000
	Operating costs:
	Cost of goods sold	75,000	60,000	135,000
	Rent (renewable each year)	12,000	7,000	19,000
	Hourly wages	35,000	26,000	61,000
	Depreciation of equipment	10,000	10,000	20,000
	Utilities	4,000	3,000	7,000
	Allocated corporate overhead	30,000	20,000	50,000
	Total operating costs	166,000	126,000	292,000
	Operating income (loss)	$34,000	($6,000)	$28,000
	If store is closed
		Gastonia Store	Concord Store	Total
	Total Revenue	$200,000	$0	$200,000
	Operating costs:
	Cost of goods sold	75,000	0	75,000
	Rent (renewable each year)	12,000	0	12,000
	Hourly wages	35,000	0	35,000
	Depreciation of equipment	10,000	10,000	20,000
	Utilities	4,000	0	4,000
	Allocated corporate overhead	30,000	15,000	45,000
	Total operating costs	166,000	25,000	191,000
	Operating income (loss)	$34,000	($25,000)	$9,000
5C	So by closing the store income is decresae by $19,000 (28000-9000)
	If store is open and new store is opened
		Gastonia Store	Concord Store	Pineville Store	Total
	Total Revenue	$200,000	$120,000	$120,000	$440,000
	Operating costs:
	Cost of goods sold	75,000	60,000	60,000	195,000
	Rent (renewable each year)	12,000	7,000	7,000	26,000
	Hourly wages	35,000	26,000	26,000	87,000
	Depreciation of equipment	10,000	10,000	0	20,000
	Rent of equipment	0	0	10,000	10,000
	Utilities	4,000	3,000	3,000	10,000
	Allocated corporate overhead	30,000	20,000	12,000	62,000
	Total operating costs	166,000	126,000	118,000	410,000
	Operating income (loss)	$34,000	($6,000)	2,000	$30,000
6B	Budgeted operating income would be $30,000