Ridley and Scott Mercantile operates two stores, one on Maple Avenue and the other on Fenner Road. Results for the month of May, which is representative of all months, are as follows:

The following information pertains to Ridley and Scott’s operations.
• One-fourth of each store’s direct fixed expenses would continue if either store were closed.
• Ridley and Scott allocates common fixed expenses to each store on the basis of sales dollars.
• Management estimates that closing the Fenner Road store would result in a 10% decrease in the Maple Avenue store’s sales, while closing the Maple Avenue store would have no effect on the Fenner Road store’s sales.

Required
a. Management believes that the Fenner Road store should be closed, since it is operating at a loss. Do you support management’s belief? Why or why not?
b. Should management consider closing the Maple Avenue store rather than the Fenner Road store? Why or why not?
c. Ridley and Scott are considering a special promotional campaign at the Fenner Road store. They expect a $6,000 monthly increase in advertising expenses to generate a 10% increase in the store’s sales volume. The campaign would not affect sales at the Maple Avenue store.
What effect would the promotion have on Ridley and Scott’s monthly income? Should the campaign be implemented? Why or why not? Ignore your answers to parts (a) and (b).
d. Half of the Fenner Road store’s dollar sales come from items that are sold at variable cost to attract customers to the store. Managers are considering deleting those items from the product mix. Doing so would reduce the Fenner Road store’s direct fixed expenses by 15% but would also reduce the remaining sales volume result by an additional 20%. There would be no effect on the Maple Avenue store. Should management implement this change in the product mix? Why or whynot?

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Maple Avenue Store Fenner Road Store Total Sales revenue Variable expenses Contribution margin Direct fixed expenses Common fixed expenses Total fixed expenses Operating income $80,000 32,000 48,000 20,000 4,000 24,000 $24,000 200,000 116.000 84,000 60,000 10,000 70,000 $ (10,000) 14,000 $120,000 84,000 36,000 40,000 6,000 46,000