Thrifty Markets, Inc., operates three stores in a large metropolitan area. The company’s segmented absorption costing income statement for the last quarter is given below:
Thrifty Markets, Inc. Income Statement For the Quarter Ended March 31
Total
Uptown Store
Downtown Store
Westpark Store
Sales
$
2,500,000
$
900,000
$
600,000
$
1,000,000
Cost of goods sold
1,450,000
513,000
372,000
565,000
Gross margin
1,050,000
387,000
228,000
435,000
Selling and administrative expenses:
Selling expenses:
Direct advertising
118,500
40,000
36,000
42,500
General advertising*
20,000
7,200
4,800
8,000
Sales salaries
157,000
52,000
45,000
60,000
Delivery salaries
30,000
10,000
10,000
10,000
Store rent
215,000
70,000
65,000
80,000
Depreciation of store fixtures
46,950
18,300
8,800
19,850
Depreciation of delivery equipment
27,000
9,000
9,000
9,000
Total selling expenses
614,450
206,500
178,600
229,350
Administrative expenses:
Store management salaries
63,000
20,000
18,000
25,000
General office salaries*
50,000
18,000
12,000
20,000
Utilities
89,800
31,000
27,200
31,600
Insurance on fixtures and inventory
25,500
8,000
9,000
8,500
Employment taxes
36,000
12,000
10,200
13,800
General office expenses—other*
25,000
9,000
6,000
10,000
Total administrative expenses
289,300
98,000
82,400
108,900
Total operating expenses
903,750
304,500
261,000
338,250
Net operating income (loss)
$
146,250
$
82,500
$
(33,000)
$
96,750
*Allocated on the basis of sales dollars.
Management is very concerned about the Downtown Store’s inability to show a profit, and consideration is being given to closing the store. The company has asked you to make a recommendation as to what course of action should be taken. The following additional information is available about the store:
a.
The manager of the store has been with the company for many years; he would be retained and transferred to another position in the company if the store were closed. His salary is $6,000 per month, or $18,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $5,000 per month.
b.
The lease on the building housing the Downtown Store can be broken with no penalty.
c.
The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed.
d.
The company’s employment taxes are 12% of salaries.
e.
A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this person’s salary amounts to $7,000 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but it does eventually become obsolete.
f.
One-third of the Downtown Store’s insurance relates to its fixtures.
g.
The general office salaries and other expenses relate to the general management of Thrifty Markets, Inc. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employee’s compensation amounts to $8,000 per quarter.
Required:
1.
Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed. (Input all amounts as a positive values. Do not round intermediate calculations. Omit the \"$\" sign in your response.)
2.
Based on your computations in (1) above, what recommendation would you make to the management of Thrifty Markets, Inc.?
3.
Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $200,000 per quarter due to loyal customers shifting their buying to the Uptown Store. The Uptown Store has ample capacity to handle the increased sales, and its gross margin is 43% of sales.
a.
Calculate the Net advantage of closing the Downtown Store. (Negative amount should be indicated by a minus sign. Omit the \"$\" sign in your response.)
b.
What recommendation would you make to the management of Thrifty Markets, Inc.?
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