Close or Retain a Store [LO2]

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 Uptown Downtown Westpark Total Store Store 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 fi xtures . . . . 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 fi xtures 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 pe r qua rter.
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.
2. Based on your computations in (1) above, what recommendation would you make to the management of Thrifty Markets, Inc.?
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. What effect would these factors have on your recommendation concerning the Downtown S tore? S how c omputations.