Question 8.2

(Total: 12 marks)

Rocky Volcano Chocolate operates two stores, one in Edmonton and another in St. John's. The following income statements were prepared for the most recent year:

	Edmonton	St. John's
Net sales	$3,780,000	$960,000
Variable costs:
Cost of goods sold	1,512,000	528,000
Sales commission	189,000	48,000
Utilities	17,200	15,300
Contribution margin	$2,061,800	$368,700
Fixed costs:
Annual building lease	84,000	39,000
Salaries	380,000	180,000
Allocated corporate overhead	750,000	250,000
Amortization of store equipment & leasehold improvements	60,000	30,000
Operating income (loss)	$787,800	$(130,300)

The store equipment and leasehold improvements have no market value. The building leases can be cancelled without penalty.

Required:

1. Calculate the dollar value of sales required for each store to break-even assuming that all of the fixed costs are to be covered?
2. Should management close the St. John's store? Assume that corporate overhead would be reduced by $100,000 if the St. John's store is closed.