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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.)

  Gross margin lost if the store is closed                 $   

  Less costs that can be avoided:                                

       Direct advertising      $   

       Sales salaries                 

       Delivery salaries          

       Store rent      

       Store management salaries    

       General office salaries              

       Utilities            

       Insurance on inventories         

       Employment taxes     

  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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