Question
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
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 |
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Total Costs | 995.000 | 890,000 |
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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 |
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Cost of Goods Sold |
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Rent |
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Labor Costs |
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Various Other Direct Costs |
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Utilities |
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Allocated Corporate Overhead |
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Total Costs |
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Net Income |
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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 |
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Less Total Additional Expenses Store 3 (ignore allocated overhead) |
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Less Additional Rent Expense |
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Less Additional Total Overhead Costs |
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Difference in Net Income |
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