Part $1$

Rivera Market $($RM$)$ runs two convenience stores, one in Vancouver and one in Surrey. Operating income for each store in the year follows:

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The equipment has a remaining useful life of one year and a zero disposal price. In a senior management meeting, Maria Lopez, the management accountant at Rivera Market, makes the following comment, $"$RM can increase its profitability by closing down the Surrey store or by adding more stores like it$."$

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Part $1$

Requirement $1.$ Calculate RM$\text{'}$s operating income if it closes down the Surrey store. By closing down the store, RM can reduce overall corporate overhead costs by $ $58$ comma $000.$ Is Maria Lopez correct? Explain. $($Enter losses in revenues as a negative amount. Leave cells blank if the cost is not relevant. If the net effect is an operating loss, enter the amount with parentheses or a minus sign.$)$

Incremental Revenue and Savings in Costs from Closing Surrey Store

Revenues

Operating costs:

Cost of goods sold

Lease rent $($renewable each year$)$

Labour costs $($paid on an hourly basis$)$

Depreciation of equipment

Utilities $($electricity$,$ heating$)$

Corporate overhead

Total operating costs

Effect on operating income $($loss$)$

Part $2$

Is Maria Lopez's statement about the effect of closing the Surrey store correct? Explain.

Because Rivera Market's operating income would increase if it closes down the Surrey store as shown by the analysis above Lopez is

not correct.

correct.

Note that by closing down the Surrey store, Rivera Market will save none of the

cost of goods sold.

equipment$-$related $($depreciation$)$ costs.

labour costs.

lease rent.

overhead costs.

utility costs.

This is because this is a past cost.

Part $3$

Requirement $2.$ Calculate RM$\text{'}$s operating income if it opens another store with revenues and costs identical to those of the Surrey store $($including a cost of $$18$ comma $000$ to acquire equipment with a one$-$year useful life and zero disposal price$).$ Opening this store will increase corporate overhead costs by $ $8$ comma $000.$ Is Maria Lopez correct? Explain. $($If the net effect is an operating loss, enter the amount with parentheses or a minus sign.$)$

Incremental Revenue and Incremental Costs of Opening New Store

Revenues

Operating costs:

Cost of goods sold

Lease rent $($renewable each year$)$

Labour costs $($paid on an hourly basis$)$

Depreciation of equipment

Utilities $($electricity$,$ heating$)$

Corporate overhead

Total operating costs

Effect on operating income $($loss$)$

Part $4$

Is Maria Lopez's statement about the effect of adding another store like the Surrey store correct?

As shown by the analysis above, if Rivera Market adds another store like the Surrey store, its operating income would

decrease.

increase.

not change.

Therefore, Lopez is

correct.

not correct.

Because Rivera Market's operating income would increase if it closes down the Surrey store as shown by the analysis above Lopez isRivera MarketNote that by closing down the Surrey store, Rivera Market will save none of theThis is because this is a past cost.As shown by the analysis above, if Rivera Market adds another store like the Surrey store, its operating income wouldTherefore, Lopez isTherefore, Lopez is

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Store Operating Income

Vancouver

Surrey

Revenues

$$1,130,000$

$$830,000$

Operating costs:

Cost of goods sold

$790,000$

$670,000$

Lease rent $($renewable each year$)$

$96,000$

$77,000$

Labour $($paid on an hourly basis$)$

$46,000$

$45,000$

Depreciation of equipment

$22,000$

$18,000$

Utilities $($electricity$,$ heating$)$

$42,000$

$46,000$

Allocated corporate overhead

$50,000$

$42,000$

Total operating costs

$1,046,000$

$898,000$

Operating income $($loss$)$

$$84,000$

$$(68,000)$

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Required

Answer the following questions referring to the data provided.

Calculate RM$\text{'}$s operating income if it closes down the Surrey store. By closing down the store, RM can reduce overall corporate overhead costs by $ $58$ comma $000.$ Is Maria Lopez correct? Explain.

Calculate RM$\text{'}$s operating income if it opens another store with revenues and costs identical to those of the Surrey store $($including a cost of $$18$ comma $000$ to acquire equipment with a one$-$year useful life and zero disposal price$).$ Opening this store will increase corporate overhead costs by $ $8$ comma $000.$ Is Maria Lopez correct? Explain.

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