Ridley and Scott Mercantile operates two stores, one on Maple Avenue and the other on Fenner Road. Results for the
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 Scottâ€™s operations.
â€¢ One-fourth of each storeâ€™s direct fixed expenses would continue if either store were closed.
â€¢ Ridley and Scott allocates common fixed expenses to each store on the basis of sales dollars.
â€¢ Management estimates that closing the Fenner Road store would result in a 10% decrease in the Maple Avenue storeâ€™s sales, while closing the Maple Avenue store would have no effect on the Fenner Road storeâ€™s sales.
a. Management believes that the Fenner Road store should be closed, since it is operating at a loss. Do you support managementâ€™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 storeâ€™s sales volume. The campaign would not affect sales at the Maple Avenue store.
What effect would the promotion have on Ridley and Scottâ€™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 storeâ€™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 storeâ€™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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