Question

Store Closing?

For this discussion, consider the following scenario:

The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It has had a negative contribution margin and a net loss for the last five years. The founder is retired and three of his children want to close the facility. The fourth does not, because it "was Dad's first place and I went there every day after school." She believes they can bring the facility back to profitability if the city's downtown revitalization project succeeds and they dedicate the first floor of the facility to retail.

• Your definition for "negative contribution margin."
• Whether the fact that the facility is not near an interstate makes a difference in the decision.
• Would it make a difference if the company were publicly traded?
• Might there be additional costs, in addition to revenues, to convert the first floor of the facility to retail?
• What risks may be associated with leasing to retail stores?
• What is your recommendation? Close and sell the facility or modify the first floor to be able to lease to retail stores.

Answer 1

1) Negative contribution margin means keeping the fixed cost constant, variable cost and expenses exceed cost.

2) Not really, as the original facility is at interstate highway and its a period of city's downtime, still the facility is near the interstate the situation would not much impacted.

3) Company has 12 facilities including the original and facilities other than original are doing good. Even all the facilities consolidated financial results to reflect the real situation. If the company were publicly traded then it is wise decision to shut down the original facility as it would leads to betterment in the results of the company and increases the value of the Company.

4) We need to assess the additional cost in comparison to additional revenue if the first floor of the original facility is given to retail. If it is viable then the same should be continue.

5) Risk associated with leasing to retail store is that of additional cost to be incurred, negative contribution margin of other floors of the facility and high real estate taxes.

6) As discussed above the decision to continue or close and sell the facility is depending on the number of revenue generated from the leasing of retail store in comparison to cost. If the same is higher as compared to negative contribution margin after all taxes, the same should be continue otherwise it should be close and sell.