PROBLEM 12-23 Close or Retain a Store (LO2] The Tilots Corporation's segmented absorption costing income statement for the last quarter for its three metropolitan stores is given below: Uptown Downtown Westpark Total Store Store Store $2,500,000 $900,000 $600,000 $1,000,000 1,450,000 513,000 372,000 565,000 1,050,000 387.000 228,000 435.000 118.500 20.000 157.000 30,000 215,000 46,950 40.000 7,200 52.000 10,000 70,000 18,300 36,000 4.800 45,000 10,000 65,000 8.800 42.500 8,000 60.000 10,000 80,000 19.850 Sales Cost of goods sold. Gross margin Selling and administrative expenses: Selling expenses Direct advertising General advertising Sales salaries.. Delivery salaries Store rent... Depreciation of store fixtures... Depreciation of delivery equipment. Total selling expenses. Administrative expenses: Store management salaries General office salaries Utilities Insurance on fixtures and inventory Employee benefits. General office expenses-other Total administrative expenses. Total operating expenses.. Operating income (loss) *Allocated on the basis of sales dollars 27.000 614.450 9,000 206,500 9.000 178,600 9,000 229,350 63.000 50.000 89.800 20,000 18,000 31,000 18,000 12,000 27,200 25,000 20,000 31,600 25.500 36,000 8,000 12,000 9,000 10.200 8,500 13.800 25,000 289,300 903,750 $ 146,250 9,000 98,000 304,500 $ 82,500 6,000 82.400 261.000 S(33,000) 10,000 108,900 338,250 $ 96,750 a. Management is very concerned about the Downtown Store's inability to show a profit, and consid- eration is being given to closing the store. The company has asked you recommend a course of action. Additional information available on the store is provided below: 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 Downtown 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. The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed. Employee benefits are 12% of salaries. c. d. 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. 8. The general office salaries and other expenses relate to the general management of the Tilots Corporation. 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 operating income that would result if the Downtown Store were closed. 2. Based on your computations in (1) above, what would you recommend to the management of the Tilots Corporation? 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 Store? Show computations