Incremental value analysis
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Currently, the A-Z Hardware store is closed on Sundays. The weekly rent of the store is $2,800, a sizeable amount compared to their weekly profits of $7,000. The owner of A-Z exclaims, "We are wasting $400 ($2,800/7 days) in rent for every Sunday we keep the store closed." He would like to open the store on Sundays as well. He expects the increased cost of sales-force compensation to be $1,500 and utility to be $500 per Sunday. Sales on a Sunday are expected to be $15,000. The cost of these items is expected to be 80% of the sales revenues ($12,000).
Required:
If sales on Sundays do not affect sales the rest of the week, what will be the weekly profit should the hardware store open on Sundays? _____________
Assume that the $5,000 loss in sales to competition can be prevented if A-Z opens the store on Sundays. The current weekly profit is $7,000 and the expected Sunday sales is $15,000, 40% of which would have occurred on other days of the week.
Required:
Should the hardware store open on Sundays? Yes No
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If sales on Sundays do not affect sales the rest of the week, what will be the weekly profit should the hardware store open on Sundays? _____________
We have to look at incremental cost and incremental revenue. If the store is kept open on Sunday
a. The incremental revenue is $15,000
b. The incremental cost is
Cost of goods sold $12,000
Sales force compensation $1,500
Utility cost ...
Solution Summary
The solution explains the use of incremental value analysis in decision making