11-30 Closing and opening stores. Sanchez Corporation runs two convenience stores, one in

Connecticut and one in Rhode Island. Operating income for each store in 2017 is as follows:

Connecticut Store Rhode Island Store

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

Labor costs (paid on an hourly basis) 42,000 42,000

Depreciation 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)

The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management

accountant at Sanchez Corporation, makes the following comment, Sanchez can increase its profitability

by closing down the Rhode Island store or by adding another store like it.

1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by

$44,000. Calculate Sanchezs operating income if it closes the Rhode Island store. Is Maria Lopezs

statement about the effect of closing the Rhode Island store correct? Explain.

2. Calculate Sanchezs operating income if it keeps the Rhode Island store open and opens another store

with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire

equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate

overhead costs by $4,000. Is Maria Lopezs statement about the effect of adding another store like

the Rhode Island store correct? Explain.

11-30 Closing and open Connecticut and one in Rhode Island. Operating income for each store in 2017 is as follows: ing stores. Sanchez Corporation runs two convenience stores, one in Connecticut Store Rhode Island Store Revenues Operating costs $1,070,000 $ 860,000 Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) Allocated corporate overhead 750,000 90,000 42,000 25,000 43,000 50,000 1,000,000 S 70,000 660,000 75,000 42,000 22,000 46,000 40,000 885,000 $ (25,000) Total operating costs Operating income (loss) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, "Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it." 1. By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000. Calculate Sanchez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of clasing the Rhode Island store correct? Explain. 2. Calculate Sanchez's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a equipment with a one-year useful life and zero disposal value). Opening this store will increase corpo- rate overhead costs by $4,000. Is Maria Lopez's statement about the effect of adding another store like cost of the Rhode Island store correct? Explain