Rivera corporation runs two convenience stores, one in Chicago and one in Denver
ID: 2586041 • Letter: R
Question
Rivera corporation runs two convenience stores, one in Chicago and one in Denver. Operating income for each store in 2017 is as follows. Each store faces different competitive challenges. In a senior management meeting you make the following statement, "we face three options: a) do nothing and keep both stores open, b) close the Denver store and keep the Chicago store, or c) keep Chicago and Denver open, and open a new store in Cleveland."
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 Cleveland and Denver will be approximately the same for the foreseeable future. Allocated corporate cost will not change by closing the Denver store and will increase by $4,000 with the Cleveland store.
In an effort to add value to the company you prepare three store segment reports and recommend a decision based on total profits.
Requirement: Circle your decision:
A: Do nothing B: Close the Denver Store C: Expand to Cleveland
Prepare three reports in proper formant on separate sheets showing the three options, supporting your decision assuming profit maximization is your basis in making the above statement. Add one paragraph on the bottom of the page for the respective option selected supporting your decision.
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 (all variable)
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)
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 (all variable)
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)
Explanation / Answer
A) DO NOTHING
Chicago
Denver
TOTAL
Revenue
$ 1,070,000
$ 860,000
19,30,000
Operating expenses
Cost of goods sold (all variable)
750,000
660,000
14,10,000
Store security system (contract, avoidable)
90,000
75,000
165000
Labor costs (all variable)
42,000
42,000
84000
Equipment lease (contract, avoidable)
25,000
22,000
47000
Utilities (heating, cooling, all variable)
43,000
46,000
89000
Allocated corporate overhead
50,000
40,000
90000
Total operating expenses
1,000,000
885,000
1885000
Operating income (loss)
$ 70,000
$ (25,000)
45000
* if the company chose the option A , operning both stores it will contribute overall profit of 45000, chicago shows profit of 70000, but denever shows loss 25000, both stores incurring same cost for labor.
B) close denever store
Chicago
Revenue
$ 1,070,000
Operating expenses
Cost of goods sold (all variable)
750,000
Store security system (contract, avoidable)
90,000
Labor costs (all variable)
42,000
Equipment lease (contract, avoidable)
25,000
Utilities (heating, cooling, all variable)
43,000
Allocated corporate overhead
90,000
Total operating expenses
10,40,000
Operating income (loss)
$30,000
* if company shutdown store denever it leads to decrese of overall profitability of company by 15000, even denever store giving loss ,closing of denever store is not benefotial for company , this is happening due to increase in corporate overhead.
C) expanding to cleveland
Chicago
Denver
Cleveland
Total
Revenue
$ 1,070,000
$ 860,000
$ 860,000
2790000
Operating expenses
Cost of goods sold (all variable)
750,000
660,000
660,000
20,70,000
Store security system (contract, avoidable)
90,000
75,000
75,000
2,40,000
Labor costs (all variable)
42,000
42,000
42,000
1,26,000
Equipment lease (contract, avoidable)
25,000
22,000
22,000
69,000
Utilities (heating, cooling, all variable)
43,000
46,000
46,000
135000
Allocated corporate overhead
94000
Total operating expenses
2734000
Operating income (loss)
56,000
* option C provide bhigher profitability compared to other options, overall profit shows 56000, it is better option fixed cost incraesd by 4000 onnly , but clelevand provide additional revenue of 15000, net invrease in overall profitability is 11000.
Chicago
Denver
TOTAL
Revenue
$ 1,070,000
$ 860,000
19,30,000
Operating expenses
Cost of goods sold (all variable)
750,000
660,000
14,10,000
Store security system (contract, avoidable)
90,000
75,000
165000
Labor costs (all variable)
42,000
42,000
84000
Equipment lease (contract, avoidable)
25,000
22,000
47000
Utilities (heating, cooling, all variable)
43,000
46,000
89000
Allocated corporate overhead
50,000
40,000
90000
Total operating expenses
1,000,000
885,000
1885000
Operating income (loss)
$ 70,000
$ (25,000)
45000
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