Problem 3 Discontinuing a Segment or Product:

La Georges Donuts Store Co., operates two stores. One on Haggerty Rd. in Livonia, and the other on Ford Rd. in Canton. Results for the month of May, which is representative of all months, are as follows:

The following information pertains to La Georges Donuts Store Co.:

One-fourth of each stores direct fixed expense would continue if either store was closed.

La Georges Donuts Store Co. allocates common fixed expenses to each location on the basis of sales dollars.

Management estimates that closing the store in Canton would result in a 10% decrease in the Livonia stores sales, while closing the Livonia store would have no effect on the Canton stores sales.

Required:

a. Management believes that the Canton store should be closed since it is operating at a loss. Do you support managements belief? Why or why not?

b. Should management consider closing the Livonia store rather than the Canton store? Why or why not?

c. La Georges Donuts Store Co. is considering a special promotional campaign at the Canton store. They expect a $6,000 monthly increase in advertising expenses to generate a 10% increase in the stores sales volume. The campaign would not affect the Livonia store in any way. What effect would the promotion have on La Georges Donuts Store Co.s monthly income? Should the campaign be implemented? Why or why not? Ignore the answers from (a) and (b) when answering this question.

d. Half of the Canton stores dollar sales come from items that are sold at variable cost to attract customers to the store. Managers are considering deleting those items from the product mix. Doing so would reduce the Canton stores direct fixed expense by 15% but would also reduce the remaining sales volume result by an additional 20%. There would be no effect on the Livonia store. Should management implement this change in the product mix? Why or why not?

Problem 3- Discontinuing a Segment or Product: Livonia Sties revenue Variable experses Contribution margin Dredt fixed experees Common fixed experees $ 80,000 120,000 200,000 32,000 48,000 84.000 84,000 46.000 70,000 Operating income 24000S(1000 Donuts Store Co., operates two stores. One on Haggerty Rd. in Livonia, and the other on Ford Rd. in Canton. Results for the month of May, which is representative of all months, are as follows: The following information pertains to La George's Donuts Store Co.: One-fourth of each store's direct fixed expense would continue if either store was closed La George's Donuts Store Co. allocates common fixed expenses to each location on the basis of sales dollars Management estimates that closing the store in Canton would result in a 10% decrease in the Livonia store's sales, while closing the Livonia store would have no effect on the Canton store's sales. Required: a. Management believes that the Canton store should be closed since it is operating at a loss. Do you support management's belief? Why or why not? b. Should management consider closing the Livonia store rather than the Canton store? Why or why not? c. La George's Donuts Store Co. is considering a special promotional campaign at the Canton store. They expect a $6,000 monthly increase in advertising expenses to generate a 10% increase in the store's sales volume. The campaign would not affect the Livonia store in any way What effect would the promotion have on La George's Donuts Store Co.'s monthly income? Should the campaign be implemented? Why or why not? Ignore the answers from (a) and (b) when answering this question. d. Half of the Canton store's dollar sales come from items that are sold at variable cost to attract customers to the store. Managers are considering deleting those items from the product mix. Doing so would reduce the Canton store's direct fixed expense by 15% but would also reduce the remaining sales volume result by an additional 20%. There would be no effect on the Livonia store. Should management implement this change in the product mix? Why or why not