The Largo Gift Hut operates a small souvenir shop in Key Largo, Florida. The shop has two departments, retail sales and mail order. Rent, utilities, and other operating expenses are allocated to the departments based on the square footage occupied by the department.

Currently, the retail sales department occupies 5,000 square feet and the mail order department occupies 1,000 square feet.

Largo’s president, Bobbye Kenyon, is thinking about buying a silkscreen machine to make souvenir T-shirts. The silkscreen machine would occupy 500 square feet of the souvenir shop’s floor space.

Kenyon believes she should not buy the silkscreen machine because it will show a loss every month. Because she is not sure, she has contacted a small consulting group to seek advice. Assume you are part of the consulting group.
Required:

a. Would the silkscreen machine show a loss every month as Kenyon suggests? Prepare a schedule to substantiate your answer.

b. Would the company’s overall monthly profits increase or decrease as a result of buying the silkscreen machine? Prepare a schedule to substantiate your answer.

c. Prepare a relevant cost schedule showing the advantage or disadvantage of buying the silkscreen machine.

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Budgeted monthly information for the store: Store rent $5,100 Salaries and wages 8,500 Utilities 1,000 Other operating expenses 3,000 Sales 80,000 Cost of goods sold 57,000 Information about the silkscreen machine: Cost of the silkscreen machine $9,640 Estimated useful life 5 years Estimated residual value $400 Floor space required 500 square feet $20 Monthly cost of electricity used by silkscreen machine Budgeted monthly amounts: T-shirt sales revenue Cost of T-shirts Cost of T-shirt supplies Wages for the T-shirt operation Store rent Utilities Other operating expenses $1,700 450 100 250 425 85 250