Question

East Meets West Ltd. operates two stores, one in Victoria and another in Halifax. The following...

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

Homework Answers

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.

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