16.5 Analyze relevant profitability data and decide whether to drop or add customers or branches.

1) A policy of dropping any customer that is currently unprofitable will eliminate, in the short run, all of the costs assigned to it.

2) Analyzing whether to add or drop a customer is an application of relevant costing analysis.

3) Allocated corporate costs are irrelevant when analyzing whether to drop a customer.

4) Bannock Safety Equipment Ltd. operates two stores, one in Edmonton and another in Thunderbay. The following income statements were prepared for the most recent year:

	Edmonton	Thunderbay
Net sales	$3,780,000	$960,000
Variable costs:
Cost of goods sold	1,512,000	528,000
Sales commission	189,000	48,000
Utilities	17,200	15,300
Contribution margin	$2,061,800	$368,700
Fixed costs:
Annual building lease	84,000	39,000
Salaries	380,000	180,000
Allocated corporate overhead	750,000	250,000
Amortization of store equipment & leasehold improvements	60,000	30,000
Operating income (loss)	$787,800	$(130,300)

The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty.

Required:

a.Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered?

b.Should management close the Thunderbay store? Assume that corporate overhead would be reduced by $100,000 if the Thunderbay store is closed.