a) Lydia Store has three departments all housed in the same building. Management is considering closing down the Jewelry Department which has consistently shows a net loss. The projected income statement is shown below:

Sundry Clothes Jewelry Total

RM RM RM RM

Sales 100,000 50,000 40,000 190,000

Variable Cost of

Goods sold and expenses 30,000 10,000 30,000 70,000

Contribution Margin 70,000 40,000 10,000 120,000

Fixed Costs

Direct, avoidable (6000) (3,000) (3,800) (12,800)

Common, allocated on

sales RM (12,000) (3,000) (8,000) (23,000)

Profit (Loss) 52,000 34,000 (1,800) 84 ,200

The RM12,800 fixed costs are salaries of the departmental supervisors and these costs can be avoided in the event that the departments are closed.

Required:

You are required:

1. To decide whether the Jewelry Department should be closed [8 marks]

2. To compute the minimum rental acceptable if the Jewelry Department is closed and the floor space is to be let out. [ 4 marks]

3. To decide whether the company should substitute the Jewelry Department with Electrical instead, using the same space. The forecasted revenues and costs are: sales RM25, 000: variable cost of sales and expenses RM10, 000; direct fixed cost RM 4,000. [8 marks]