Reference no: EM132613931

Lydia Store has three departments all housed in the same building. Management is considering closing down the Jewelry Department which has consistently shows a net loss. The projected income statement is shown below:

                                                              Sundry                        Clothes                    Jewelry                     Total

                                                               RM                                   RM                             RM                       RM

Sales                                          100,000                        50,000               40,000             190,000

Variable Cost of

Goods sold and expenses                30,000                          10,000                 30,000          70,000

Contribution Margin                        70,000                            40,000               10,000        120,000

Fixed Costs

Direct, avoidable                           (6000)                        (3,000)                (3,800)        (12,800)

Common, allocated on

sales RM                                   (12,000)                         (3,000)                  (8,000)      (23,000)

Profit (Loss)                                 52,000                          34,000                (1,800)         84 ,200

The RM12,800 fixed costs are salaries of the departmental supervisors and these costs can be avoided in the event that the departments are closed.

Required:

You are required:

Question i. To decide whether the Jewelry Department should be closed

Question ii. To compute the minimum rental acceptable if the Jewelry Department is closed and the floor space is to be let out.

Question iii. To decide whether the company should substitute the Jewelry Department with Electrical instead, using the same space. The forecasted revenues and costs are: sales RM25, 000: variable cost of sales and expenses RM10, 000; direct fixed cost RM 4,000.