Sparta Fashions owns four clothing stores, where it sells a wide range of women’s fashions, from casual attire to formal wear. In addition, it rents formal wear and gowns for special occasions. At the end of last year, the financial statements showed that although Sparta Fashions as a whole was comfortably profitable, the Downtown store had shown a substantial loss. The following is the income statement for the Downtown store store for year just ended:

^a These costs would be saved if the store were closed.

^b The lease is cancellable and would be saved if the store were closed.

^c Assessed annually on the basis of average inventory on hand each month.

^d 12 percent of cost of departmental equipment. The equipment has no salvage value, and Sparta Fashions would incur no costs in scrapping it.

^e Allocated on the basis of store sales as a fraction of total company sales. Management estimates that 15 percent of these costs allocated to the Downtown store could be saved if the store were closed.

^f Based on average inventory quantity multiplied by the company’s borrowing rate for threemonth loans.  

The Downtown store is the only one in the chain that shows an annual loss, and members of the board believe it should be closed. Both the corporate operations and finance staff agree that closing the Downtown store will not negatively impact sales at the other stores.

Required

What would you recommend Sparta Fashions do about the Downtown store? Should it be closed? Why?  

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Sales Cost of goods sold Gross margin.. Costs: Sparta Fashions Downtown Store Store-Level Income Statement Salaries, wages, and commissions". Lease.. State taxes Insurance on inventory. Depreciation Administration and general office.. Interest for inventory carrying costs. Total costs... Loss. $84,150 26,565 4,125 30,360 12,375 33,000 7,425 $1,072,500 924,000 $ 148,500 198,000 $ (49,500)