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Problem 3- Discontinuing a Segment or Pro La George's Donuts Store other on Ford Rd. in for t months, are as follows: duct: Co., operates two stores. One on Haggerty Rd. in Livonia, and the canton. Results for the month of May, which is representative of all Canton store 120,000 200,000 Livonia Total store Sales revenue Variable expenses Contribution margin Direct fixed expenses Common fixed expenses Total fixed expenses Operating income $ 80,000 320000 36,000 40,000 6,000 24,000 46:000 116,000 84,000 60,000 10,000 84,000 48,000 20,000 4,000 70,000 24,000 (10,000) 14,000 The following information pertains to La George's Donuts Store Co.: One-fourth of each store's direct fixed expense would continue if either store was closed. La George's Donuts 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 store's sales . * Required: 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? Should management consider closing the Livonia store rather than the Canton store? Why or why not? La George's Donuts 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 George's Donuts Store Co.'s monthly income? Should the campaign be implemented? Why or why not? Ignore the answers from (a) and (b) when answering this question. 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% bu would also reduce the remaining sales volume result by an additional 20%. There woul be no effect on the Livonia store. Should management implement this change in the product mix? Why or why not? a. b. c. d

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