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 |
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.
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