An outside contractor has offered to do the finishing operation for an additional 10,000 units and will charge $9.00 per unit. Should Blair accept the offer? How much will Blair make (or lose) on this proposal?

What is the increase in revenue?
What is the increase in variable costs (direct materials)?
What is the increase in finishing costs (from outside contractor)?
What are the total variable costs?
What is the increase in contribution margin?
Should Blair invest in the tools?

Problem 2: Unprofitable Store

Hunt Enterprises has two stores with the following information regarding their income statement:

	Store # 1	Store # 2
Revenues	$1,070,000	$860,000
Cost of Goods Sold	750,000	660,000
Rent	90,000	75,000
Labor Costs	42,000	42,000
Various Other Direct Costs	25,000	22,000
Utilities	43,000	46,000
Allocated Corporate Overhead	45,000	45,000
Total Costs	995.000	890,000
Net Income	$75,000	$(30,000)

The corporate overhead costs are allocated evenly between the two stores. All other expenses on the income statement are direct costs.

Hunt is looking at closing store #2. If the store is closed, it is estimated that total corporate overhead expenses will decrease by $44,000.

• Prepare an income statement combining the two stores and also assuming the second store is closed.
• Should Hunt close store #2? What is the difference in net income?

	Both Stores As Is	Close Store # 2
Revenues
Cost of Goods Sold
Rent
Labor Costs
Various Other Direct Costs
Utilities
Allocated Corporate Overhead
Total Costs
Net Income

Issue #2 Open a Third Store

Instead of closing Store #2, Hunt is thinking of opening a third store. The store would have the exact same income and expense numbers as Store #2 except for the following:

• An additional rent of $22,000
• Total corporate overhead costs would increase by $9,000. These costs would still be allocated evenly among the three stores.

Should Hunt open a third store? What is the net change in total net income for the three stores combined?

Additional Revenues Store 3
Less Total Additional Expenses Store 3 (ignore allocated overhead)
Less Additional Rent Expense
Less Additional Total Overhead Costs
Difference in Net Income