Question

GST Corporation runs two convenience stores, one in Minneapolis and one in St. Paul. Operating income for each store in 2013 is:


The equipment has a zero disposal value. In a senior management meeting, Sven Larsen, management accoun-tant at GST Corporation, comments: “ GST can increase its profitability by closing down the St. Paul store or by adding another store like it.”

Required
1. By closing down the St. Paul store, GST can reduce overall corporate overhead costs by $ 88,000. Calculate GST’s operating income if it closes the St. Paul store. Is Sven Larsen’s statement about the effect of closing the St. Paul store correct? Explain.
2. Calculate GST’s operating income if it keeps the St. Paul store open and opens another store with revenues and costs identical to the St. Paul store (including a cost of $ 44,000 to acquire equipment with a 1- year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $ 8,000. Is Sven Larsen’s statement about the effect of adding another store like the St. Paul store correct?Explain.


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  • CreatedJanuary 15, 2015
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