Share
Explore BrainMass

Incremental value analysis

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

Solution Preview

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

$2.19