Question $8\mathrm{.}2$

$($Total: $12$ marks$)$

Rocky Volcano Chocolate operates two stores, one in Edmonton and another in St$.$ John$$s$.$ The

following income statements were prepared for the most recent year:

Edmonton St$.$ John$$s

Net sales $$3,780,000$ $$960,000$

Variable costs:

Cost of goods sold $1,512,000528,000$

Sales commission $189,00048,000$

Utilities $17,20015,300$

WWW$.$YORKVILLEU.CA

$19$

Contribution margin $$2,061,800$ $$368,700$

Fixed costs:

Annual building lease $84,00039,000$

Salaries $380,000180,000$

Allocated corporate overhead $750,000250,000$

Amortization of store equipment & leasehold improvements $60,00030,000$

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 St$.$ John$$s store? Assume that corporate overhead

would be reduced by $$100,000$ if the St$.$ John$$s store is closed.