PROBLEM 12-23 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 se Income Statement For the Quarter Ended March 31 Uptown Store Downtown Store Westpark w. Store sa BER 123 Totall $2,500,000 1,450,000 1,050,000 $900,000 513,000 387,000 $600,000 372,000 228,000 $1,000,000 565,000 435,000 118,500 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. Employment taxes General office expenses-other*. Total administrative expenses Total operating expenses. Net operating income (loss). 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 $ (33,000) 10,000 108,900 338,250 $ 96,750 *Allocated on the basis of sales dollars. 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 to make a recommendation as to what course of action should be taken. The following additional information is available about the store: 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 a. c. $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. 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 per quarter. Required: 1. Prepare a schedule showing the change in revenues and expenses and the impact on the over- all 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 man- agement 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 Down- town Store? Show computations. Problem 12-23 THRIFTY MARKETS, INC. Schedule Gross margin lost if the store is closed Less costs that can be avoided: Direct advertising Sales salaries Delivery salaries Store rent Store management salaries General office salaries Utilities Insurance on inventories Employment taxes* Decrease in company net operating income if the Downtown Store is closed *Salaries avoided by closing store: Sales salaries Delivery salaries Store management salaries General office salaries Total salaries Employment tax rate Employment taxes avoided 3. Computations Gross margin lost if the Downtown Store is closed Gross margin gained at the Uptown Store Net loss in gross margin Less avoidable costs if Downtown Store is closed Net advantage of closing the Downtown Store