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Contribution Margin Determination and closing decision

Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are available for the period just ended:

Sales $205,000
Cost of sales 67,900
Building occupancy costs:
Rent 36,500
Utilities 15,000
Supplies used 5,600
Wages 77,700
Miscellaneous 2,400
Allocated corporate overhead 16,800

All employees except the store manager would be discharged. The manager, who earns $27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Also, no. 16's furnishings and equipment are fully depreciated and would be removed and transported to Papa Fred's warehouse at a cost of $2,800.

A. What is store no. 16's reported loss for the period just ended?
B. Should the store be closed? Why?
C. Would pizza likely lose all $205,000 of sales revenue if store no. 16 were closed? Explain.

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Solution Preview

A. What is store no. 16's reported loss for the period just ended? Please see attached spreadsheet.

Note: The cost of removing the FF&E is not part of the expense of the period just ended. This cost would not be included in the closing decision.
Additionally, the manager being moved to another location is not part of the closing decision. ...

Solution Summary

Discussion of contribution margin and decision to close a under-performing location. Financial analysis of variable costs and the decision to keep or close store location.