Closing and opening stores Sanchez Corporation runs two convenience stores, one in Connecticut and one in Rhode Island. Operating income for each store in 2009 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 Rhode Island store or by adding another store like it.”

1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs b $44,000. Calculate Sanchez’s operating income if it closes the Rhode Island store. Is Maria Lopez’s statement about the effect of closing the Rhode Island store correct? Explain.

2. Calculate Sanchez’s operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island 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 Rhode Island store correct? Explain.

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Connecticut Store Rhode Island Store $1,070,000 $860,000 Revenues Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) Allocated corporate overhead Total operating costs Operating income (lass) 750,000 660,000 75,000 90,000 42,000 42,000 25,000 22,000 46,000 43,000 50,000 1,000,000 $ 70,000 40,000 885,000 S(25,000)