Mitchs Markets, Inc., operates three stores in a large metropolitan area. The companys segmented absorption costing income statement for the last quarter is given below:

Mitchs Markets, Inc. Income Statement For the Quarter Ended March 31 Total Uptown Store Downtown Store West Loop Store Sales $ 2,700,000 $ 1,000,000 $ 600,000 $ 1,100,000 Cost of goods sold 1,484,000 560,000 359,000 565,000

Gross margin 1,216,000 440,000 241,000 535,000

Selling and administrative expenses: Selling expenses: Direct advertising 121,300 37,000 42,000 42,300 General advertising* 19,000 7,037 4,222 7,741 Sales salaries 152,000 47,000 42,000 63,000 Delivery salaries 33,000 11,000 11,000 11,000 Store rent 203,000 67,000 63,000 73,000 Depreciation of store fixtures 46,360 17,800 8,700 19,860 Depreciation of delivery equipment 27,000 9,000 9,000 9,000

Total selling expenses 601,660 195,837 179,922 225,901

Administrative expenses: Store management salaries 77,000 24,000 24,000 29,000 General office salaries* 47,000 17,407 10,444 19,149 Utilities 94,600 31,000 32,000 31,600 Insurance on fixtures and inventory 24,900 7,800 8,800 8,300 Employment taxes 36,300 11,100 12,200 13,000 General office expensesother* 22,000 8,148 4,889 8,963

Total administrative expenses 301,800 99,455 92,333 110,012

Total operating expenses 903,460 295,292 272,255 335,913

Net operating income (loss) $ 312,540 $ 144,708 $ (31,255) $ 199,087

*Allocated on the basis of sales dollars.

Management is very concerned about the Downtown Stores 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 $8,000 per month, or $24,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $7,000 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 companys employment taxes are 15% of salaries. e.

A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this persons salary amounts to $9,500 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 Stores insurance relates to its fixtures. g.

The general office salaries and other expenses relate to the general management of Mitchs Markets, Inc. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employees compensation amounts to $9,000 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. (Decreases should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

2.

Based on your computations in requirement (1) above, what recommendation would you make to the management of Mitchs Markets, Inc.?

The Downtown Store should be closed. The Downtown Store should not be closed.

3.

Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $400,000 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.

Calculate the Net advantage of closing the Downtown Store.