costacctg13_sm_ch11

By closing down the rhode island store sanchez can

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Unformatted text preview: rporate costs). Note that by closing down the Rhode Island store, Sanchez Corporation will save none of the equipment­ related costs because this is a past cost. Also note that the relevant corporate overhead costs are the actual corporate overhead costs $44,000 that Sanchez expects to save by clo sing the Rhode Island store. The corporate overhead o f $40,000 allocated to the Rhode Island store is irrelevant to the analys is. 2. Solution Exhibit 11­25, Column 2, presents the relevant revenues and relevant costs of opening another store like the Rhode Island store. Lopez is correct that opening such a store would increase Sanchez Corporation’s operating inco me by $11,000. Incremental revenues of $860,000 exceed the incremental costs of $849,000 (from higher cost of goods sold, rent, labor, utilit ies, and so me addit io nal corporate costs). Note that the cost of equipment written off as depreciat ion is relevant because it is an expected future cost that Sanchez will incur only if it opens the new store. Also note that the relevant corporate overhead costs are the $4,000 of actual corporate overhead costs that Sanchez expects to incur as a result o f opening the new store. Sanchez may, in fact, allocate more than $4,000 of corporate overhead to the new store but this allocat ion is irrelevant to the analysis. The key reason that Sanchez’s operating inco me increases eit her if it closes down the Rhode Island store or if it opens another store like it is the behavior of corporate overhead costs. By closing down the Rhode Island store, Sanchez can significantly reduce corporate overhead costs presumably by reducing the corporate staff that oversees the Rhode Island operation. On the other hand, adding another store like Rhode Island does not increase actual corporate costs by much, presumably because the exist ing corporate staff will be able to oversee the new store as well. SOLUTION EXHIBIT 11­25 Relevant­Revenue and Relevant­Cost Analysis of Closing Rhode Island Store and Opening Another Store Like It. (Loss in Revenues) and Savings in Costs from Closing...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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