Closing and opening stores. Sundry Corporation runs two convenience stores, one in Vancouver and one in Surrey. Operating income for each store in 2010 follows:

The equipment has a remaining useful life of one year and zero disposal price. In a senior management meeting, Maria Lopez, the management accountant at Sundry Corporation, makes the following comment: “Sundry can increase its profitability by closing down the Surrey store or by adding more stores like it.”
REQUIRED Answer the following questions referring to the preceding data.
1. Calculate Sundry’s operating income if it closes down the Surrey store. By closing down the store, Sundry can reduce overall corporate overhead costs by $44,000. Is Maria Lopez correct? Explain.

2. Calculate Sundry’s operating income if it opens another store with revenues and costs identical to the Surrey store (including a cost of $22,000 to acquire equipment with a oneyear useful life and zero disposal price). Opening this store will increase corporate overhead costs by $4,000. Is Maria Lopez correct? Explain.LO1

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Vancouver Surrey Revenues $1,070,000 $860,000 Operating costs: Cost of goods sold 750,000 660,000 Lease rent (renewable each year) 90,000 75,000 Labour (paid on an hourly basis) 42,000 42,000 Amortization of equipment 25,000 22,000 Utilities (electricity, heating) 43,000 46,000 Allocated corporate overhead 50,000 40,000 Total operating costs 1,000,000 885,000 Operating income (loss) 70,000 (25,000)