Athens Corp. is a little two-store retailer operating in a local market. Its problem is that one store in the company is losing money while the other one is making money, based on company financial reports, causing the company as a whole to lose money. The most recent income statement for Athens Corp. is given below:

Store 1 Store 2 Total Sales $974,890 $1,143,800 $2,118,690

Variable expenses 590,520 682,290 1,272,810 Contribution margin 384,370 461,510 845,880

Traceable fixed expenses 468,160 267,730 735,000

Store segment margin ( 83,790) 194,180 110,390 Common fixed expenses 114,380 83,790 198,170

Net operating income (loss) $(198,170) $ 110,390 $ (87,780)

Due to its poor showing, Athens Corp. officials are considering closing Store 1. However, management and the workers at Store 1 say, Not so fast! A study by a consultant hired by Athens Corp. officials show that if Store 1 is closed, 43 percent of its traceable fixed expenses will continue unchanged. The study also shows that closing Store 1 would result in a 24 percent decrease in sales in Store 2. The company allocates common fixed expenses to the stores on the basis of sales dollars. Management and workers at Store 1 claim that Store 1 is being unfairly targeted for closure.

Your uncle, the CEO of Athens Corp., knows that you are a student in the prestigious Delta State University Integrated MBA Program, and so has turned to you for advice on what to do.

Required

1. Compute Athens Corps net operating income (loss) if Store 1 is closed.

2. Compare the net operating income (loss) calculated if Store 1 is closed with the current total net operating loss. What is the net difference?

3. What should you tell your uncle regarding Store 1? Should it be closed or do store management and workers have a basis for their claims?

4. Given the profit or loss overall for the company, what is your recommendation to your uncle regarding the capital invested in Athens Corp.?

5. What strategy or strategies could Athens Corp. adopt that would make you change your advice to your Uncle regarding Athens Corp. as a whole? In other words, what would you do as a turn-around specialist to make Athens Corp. profitable overall.