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.
For the Quarter Ended March 31
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:
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
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 $8,000 per quarter.
1. Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed. (Input all amounts as a positive values. Do not round intermediate calculations. Omit the \"$\" sign in your response.)
Gross margin lost if the store is closed $
Less costs that can be avoided:
Direct advertising $
Store management salaries
General office salaries
Insurance on inventories
Decrease in company net operating income $
2. Based on your computations in (1) above, what recommendation would you make to the management of Thrifty Markets, Inc.?
The Downtown Store should not be closed.
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.)
Net advantage of closing the Downtown Store $
b. What recommendation would you make to the management of Thrifty Markets, Inc.?
The Downtown Store should be closed.
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