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Question - 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.
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