Smith Corporation runs two convenience stores, one in Chicago and one in Denver. Operating income for each store in 2019 is as follows. Each store faces different competitive challenges. In a senior management meeting, you make the following statement, "we face two options: a) keep both stores open and try to increase profits in Denver or b) close the Denver store and keep the Chicago store.

Your statement is based on an analysis where equipment has a zero disposal value and leased on an annual contract. A further estimate is that sales, product mix and variable cost in Chicago and Denver are approximately the same for the foreseeable future. Allocated corporate cost will decrease by $30,000 if the Denver store is closed.

Requirement:

Prepare two reports in proper decision-making format on separate sheets showing the two options. Write a one-page memo supporting your decision, a or b, assuming profit maximization and qualitative issues are taken into consideration in making the decision. In answering take into consideration the careful discussion we had in class regarding the use of the contribution margin ratio in decision-making and the best approach in serving a customer/client.

	Chicago	Denver
Revenue	$ 1,070,000	$ 860,000
Operating expenses
Cost of goods sold (all variable)	750,000	660,000
Store security system (contract, avoidable)	90,000	75,000
Labor costs (paid on an hourly basis)	42,000	42,000
Equipment lease (contract, avoidable)	25,000	22,000
Utilities (heating, cooling, all variable)	43,000	46,000
Allocated corporate overhead	50,000	40,000
Total operating expenses	1,000,000	885,000
Operating income (loss)	$ 70,000	$ (25,000)

Turn in order:

1. Memo
2. Option a
3. Option b