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 rep resentative of all months, are as follows:

The following information pertains to Ridley and Scott’s operations.

• Forty percent 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 15% 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 $8,000 monthly increase in advertising expenses to generate a 15% 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. Instead of closing the Fenner Road store or running the promotional campaign, Ridley and Scott is considering modifications to the product mix offered at the Fenner Road store. Thirty percent 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 20% but would also reduce the remaining sales volume result by an additional 15%. There would be no effect on the Maple Avenue store. Should management implement this change in the product mix? Why or why not?

Transcribed Image Text:

Maple Avenue Fenner Store Road Store Total Sales revenue $80,000 32,000 $120,000 $200,000 Variable expenses 80,000 112,000 Contribution margin Direct fixed expenses Common fixed expenses 48,000 40,000 88,000 20,000 35,000 55,000 8,000 12,000 20,000 Total fixed expenses 28,000 47,000 75,000 Operating income $20,000 $ (7,000) $ 13,000