Question

Sanchez Corporation runs two convenience stores, one in Vancouver and one in Surrey. Operating income for each store in 2013 is as follows:
The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, “Sanchez can increase its profitability by closing down the Surrey store or by adding another store like it.”
Required
1. By closing down the Surrey store, Sanchez can reduce overall corporate overhead costs by$44,000. Calculate Sanchez’s operating income if it closes the Surrey store. Is Maria Lopez’s statement about the effect of closing the Surrey store correct? Explain.
2. Calculate Sanchez’s operating income if it keeps the Surrey store open and opens another store with Revenue and costs identical to the Surrey store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $4,000. Is Maria Lopez’s statement about the effect of adding another store like the Surrey store correct? Explain.


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  • CreatedJuly 31, 2015
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