Rivera Corporation runs two convenience stores, one in Connecticut and one in Rhode Island. Operating income for each store in 2014 is as follows: (Click to view the operating income for the stores.) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Rivera Corporation, makes the following comment, "Rivera can increase its profitability by closing down the Rhode Island store," Is Maria Lopez Correct? Read the requirements. Requirement 1. By closing down the Rhode Island store, Rivera can reduce overall corporate overhead costs by $40,000. Calculate Rivera's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. Begin by calculating Rivera's operating income if it closes the Rhode Island store. (Enter losses in revenues as a negative amount. Enter a " 0 " if the cost is not relevant. If the net effect is an operating loss enter the amount with parentheses or a minus sign.) \begin{tabular}{|c|c|c|c|c|} \hline & \multicolumn{2}{|c|}{ Connecticut Store } & Rhode Island Store & \\ \hline Revenues & $ & 1,110,000$ & 850,000 & \\ \hline Operating costs & & & & \\ \hline Cost of goods sold & & 760,000 & 670,000 & \\ \hline Lease rent (renewable each year) & & 91,000 & 71,000 & \\ \hline Labor costs (paid on an hourly basis) & & 48,000 & 42,000 & \\ \hline Depreciation of equipment & & 22,000 & 23,000 & \\ \hline Utilities (electricity, heating) & & 40,000 & 54,000 & \\ \hline Allocated corporate overhead & & 51,000 & 35,000 & \\ \hline Total operating costs & & 1,012,000 & 895,000 & \\ \hline \end{tabular} Total operating costs Operating income (loss) \begin{tabular}{lrr} \hline & 1,012,000 & \\ \hline$ & 98,000 & $955,000 \\ \hline \hline \end{tabular} Requirements 1. By closing down the Rhode Island store, Rivera can reduce overall corporate overhead costs by $40,000. Calculate Rivera's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 2. Calculate Rivera's operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $23,000 to acquire equipment with a one-year useful life and zero disposal value). Opening this store will increase corporate overhead costs by $2,000. Is Maria Lopez's statement about the effect of adding another store like the Rhode Island store correct? Explain
