Luce Original Baking Supplies (LOBS) sells equipment to homes and small businesses for baking. There are two distribution channels. Customers can shop and purchase at a retail outlet located near the company warehouse. Alternatively, they can order online and have it delivered.

The company founder and president has been disappointed in the retail profitability and is considering offering only the online option. The most recent income statement for the Retail Channel follows.

Closing the retail outlet will not affect total corporate costs. The marketing manager at LOBS estimates that the company will lose 40 percent of the current retail sales. This estimate assumes that some retail customers will switch to the online service while others will shop elsewhere. The  marketing manager also plans to cut advertising currently assigned to retail by 25 percent. The remaining amount will be added to the online marketing campaign. 

The operations manager estimates that cost of goods will also fall by 40 percent of the current cost of the retail operation. Sixty percent of current retail staff costs will be saved. The remaining 40 percent will be added to warehouse staffing costs. No sales commissions are paid for sales through the online channel. The retail outlet building and property are currently leased on an annual basis and the lease can be cancelled without penalty at any time. Shipping costs in the online channel will increase by $200,000 because of the additional online sales.

Required

a. What revenues and costs are probably differential for the decision to discontinue the Retail Channel at LOBS?

b. What will be the effect on LOBS income if the Retail Channel is closed?

c. Is there any other information you would like to have before making your recommendation?

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1 23 3 A B LUCE ORIGINAL BAKING SUPPLIES Retail Distribution Channel Income Statement For the Year Ending October 31 4 5 Sales revenue 6 7 Costs 8 9 10 11 12 13 14 Total costs 15 Net loss before tax benefit 16 Tax benefit at 25% 17 Net loss 18 Cost of goods sold Advertising C Retail store staff costs Sales commissions Retail store lease expenses Allocated corporate costs D $19,100,000 $11,222,000 2,895,000 1,013,000 500,000 1,640,000 1,954,000 $19,224,000 ($124,000) (31,000) ($93,000)