Home Builder Supply, a retailer in the home improvement industry, currently oper

Question

Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $15,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store Which of the following should be included as part of the incremental earnings for the proposed new retail store? a. The original purchase price of the land where the store will be located b. The cost of demolishing the abandoned warehouse and clearing the lot. c. The loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead d. The $15,000 in market research spent to evaluate customer demand e. Construction costs for the new store f. The value of the land if sold g. Interest expense on the debt borrowed to pay the construction costs

Explanation / Answer

The company is planning to launch a new store at a location where it already owns the land. There would be incremental costs associated with opening of the new store.

a. Original purchase price of the land where the new store is to be located cannot be considered as an incremental expense or earning as it is classified as capital expense.

b. The cost of demolishing the abandoned warehouse and clearing the lot would be an incremental expense of opening the new store as it is directly linked to operating the new store

c. Loss of sales from the existing retail outlet would not be considered as an incremental expense as this is an opportunity cost associated with opening of the new store.

d. The marketing reserach expense would be recorded as preliminary expenses of opening the retail store. Thus, it is an incrementl expense incurred for oprning the new store.

e. Construction cost for the new store is an incremental expense that the management has to incure if it wants to open the new store.

f. The value of the land if sold is again an opportunity cost of the land, which cannot be classified as incremental expense/ earning.

g. Interest expense on the debt borrowed to pay the construction cost is en incremental expense for opening the new store.

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