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The following information pertains to La Gorge’s Donut Store Co. :

  • One-fourth of each store’s direct fixed expense would continue if either store was closed.
  • La Gorge’s Donut Store Co. allocates common fixed expenses to each location on the basis of sales dollars.
  • Management estimates that closing the store in Canton would result in a 10% decrease in the Livonia store’s sales, while closing the Livonia store would have no effect on the canton’s Store’s sales.

Required:

a. Management believes that the Canton store should be closed since it is operating at a loss. Do you support management’s belief? Why or why not?

b. Should management consider closing the Livonia store rather than the Canton store? why or why not?

c. La Gorge’s Donut Store Co. is considering a special promotional campaign at the Canton store. They expect a $6,000 monthly increase in advertising expenses to generate a 10% increase in the store’s sales volume. The campaign would not affect the Livonia store in any way. What effect would the promotion have on La Gorges’s Donut Store Co. monthly income? Should the campaign be implenented? why or why not?

d. Half of the Canton Store’s dollar sales come from items that are sold at variable cost to attract customers to the store. Managers are considering deleting those items from the product mix. Doing so would reduce the Canton Store’s direct fixed expense by 15% but would also reduce the remaining sales volume result by an additional 20%.There would be no effect on the Livonia store. Should management implement this change in the product mix? why or why not?

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