Reference no: EM13509810

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	$	3,300,000		$	1,300,000		$	600,000		$	1,400,000
Cost of goods sold		1,655,000			728,000			359,000			568,000
Gross margin		1,645,000			572,000			241,000			832,000
Selling and administrative expenses:
Selling expenses:
Direct advertising		118,100			34,000			42,000			42,100
General advertising*		16,000			6,303			2,909			6,788
Sales salaries		156,000			51,000			43,000			62,000
Delivery salaries		33,000			11,000			11,000			11,000
Store rent		208,000			69,000			63,000			76,000
Depreciation of store fixtures		46,050			17,600			8,600			19,850
Depreciation of delivery equipment		18,000			6,000			6,000			6,000
Total selling expenses		595,150			194,903			176,509			223,738
Administrative expenses:
Store management salaries		68,000			21,000			21,000			26,000
General office salaries*		48,000			18,909			8,727			20,364
Utilities		90,600			30,000			30,000			30,600
Insurance on fixtures and inventory		22,800			7,100			8,100			7,600
Employment taxes		38,000			11,800			12,500			13,700
General office expenses"other*		24,000			9,455			4,364			10,181
Total administrative expenses		291,400			98,264			84,691			108,445
Total operating expenses		886,550			293,167			261,200			332,183
Net operating income (loss)	$	758,450		$	278,833		$	(20,200	)	$	499,817

 

*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 $7,000 per month, or $21,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $6,000 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 11% 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 $8,500 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 positive values. Do not round intermediate calculations. Round your intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)

$
Less costs that can be avoided: $
$

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.
The Downtown Store should 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 44% of sales.

a. Calculate the Net advantage of closing the Downtown Store. (Negative amount should be indicated with a minus sign. Do not round intermediate calculations. Round your intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; 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 not be closed.

The Downtown Store should be closed.