Reference no: EM131328355

Assignment

EXCEL Format Required

Bob's Beans, a coffee shop and breakfast catering chain, operates three cafes in South Florida. Segment reporting for the last quarter as follows:

Bob's Beans, Inc. Income Statement For the Quarter
	Total	Location 1	Location 2	Location 3
Sales	3,000,000	720,000	1,200,000	1,080,000
COGS	1,657,200	403,200	660,000	594,000
Gross margin	1,342,800	316,800	540,000	486,000
SG&A Expenses:
Selling expenses	817,000	231,400	315,000	270,600
Admin expenses	383,000	106,000	150,900	126,100
Total expenses	1,200,000	337,400	465,900	396,700
Net operating income (loss)	142,800	-20,600	74,100	89,300

Location 1 has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:

a. The breakdown of the selling and administrative expenses is as follows (Advertising costs, general office salaries and general office other are incurred at the total company level and allocated based on sales dollars):

	Total	Location 1	Location 2	Location 3
Selling expenses:
Sales salaries	239,000	70,000	89,000	80,000
Direct advertising	187,000	51,000	72,000	64,000
General advertising	45,000	10,800	18,000	16,200
Store rent	300,000	85,000	120,000	95,000
Depreciation of store fixtures	16,000	4,600	6,000	5,400
Delivery salaries	21,000	7,000	7,000	7,000
Depreciation of delivery equipment	9,000	3,000	3,000	3,000
Total selling expenses	817,000	231,400	315,000	270,600
	Total	Location 1	Location 2	Location 3
Administrative expenses:
Store management salaries	70,000	21,000	30,000	19,000
General office salaries	50,000	12,000	20,000	18,000
Insurance on fixtures and inventory	25,000	7,500	9,000	8,500
Utilities	106,000	31,000	40,000	35,000
Employment taxes	57,000	16,500	21,900	18,600
General office-other	75,000	18,000	30,000	27,000
Total administrative expenses	383,000	106,000	150,900	126,100

b. The lease on the building housing the Location 1 can be broken with no penalty.

c. The fixtures being used in the Location 1 would be transferred to the other two stores if the Location 1 were closed.

d. The general manager of the Location 1 would be retained and transferred to another position in the company if the Location 1 were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $11,000 per quarter. The general manager of the Location 1 would be retained at her normal salary of $12,000 per quarter. All other employees in the store would be discharged.

e. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the Location 1 were closed. This person's salary is $4,000 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.

f. The company's employment taxes are 15% of salaries.

g. One-third of the insurance in the Location 1 is on the store's fixtures.

h. The "General office salaries" and "General office-other" relate to the overall management of the company. If the Location 1 were closed, one person in the general office could be discharged because of the decrease in overall workload. This person's compensation is $6,000 per quarter.

Required:

1. Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net operating income that would result if the Location 1 were closed.

2. Assuming that the store space can't be subleased, what recommendation would you make to the management of Bob's Beans?

3. Disregard requirement 2. Assume that if the Location 1 were closed, at least one-fourth of its sales would transfer to the Location 3, due to strong customer loyalty to Bob's Beans. Location 3 has enough capacity to handle the increased sales. You may assume that the increased sales in Location 3 would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation concerning the Location 1?

Show all computations to support your answer.