Problem:
ABC operates a small camera store in Miami. The store has two departments, camera sales and photo finishing. Rent, utilities, and other operating expenses are allocated to the departments based on the square footage occupied by the department. Currently, the camera sales department occupies 3,000 square feet and the photo finishing department occupies, 2,000 square feet.
ABC president, Joe Smith, is thinking about buying a computer system to produce poster prints. The poster printing system would occupy 200 square feet of the store's floor space.
Budgeted monthly information for the store:
Store rent $ 5000
Salaries and wages 10,500
Utilities 750
Other operating expenses 3000
Sales 125,000
Cost of goods sold 95,000
Information about the poster printing system:
Cost of poster system $25,700
Estimated useful life 5yrs
Estimated residual value $500
Floor space required 200 square feet
Monthly cost of electricity used by poster system 50
Budgeted monthly amounts:
Poster sales revenue $1,200
Poster supplies 200
Wages for poster operation 250
Store rent 200
Utilities 32
Other operating expenses 120
Clifford believes the company should not buy the poster system because it will show a loss every month. Because he is not sure, he has contacted a small consulting group to seek advice. Assume you are part of the consulting group.
Required:
a. Would the poster system show a loss every month as Clifford suggest? Prepare a schedule to substantiate your answer.
b. Would the company's overall monthly profits increase or decrease as a result of buying the poster system? Prepare a schedule to substantiate your answer.
c. Prepare a relevant cost schedule showing the advantage or disadvantage of buying the poster system.