Style, Inc. operates three stores in a large metropolitan area. The companys segmented absorption costing income statement for the last quarter follows:

Style, Inc.

Income Statement

For the Quarter Ended March 31

Total

Uptown Store

Downtown Store

Eastpark Store

Sales

$ 2,500,000

$ 900,000

$ 750,000

$ 1,000,000

Cost of goods sold

1,450,000

513,000

522,000

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

60,000

80,000

Depreciation of store fixtures

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

173,600

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 fixtures 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

$ (28,000)

$ 96,750

Additional Data:

Manager's salary per quarter

$ 18,000

New employee's salary per month

$ 5,000

Employment tax as a percentage of salaries

12%

Delivery person's salary per quarter

$ 7,000

Insurance related to downtown fixtures

1/3

Discharged employee's salary per quarter

$ 8,000

Assumed sales transferred to Uptown store

$ 200,000

Uptown store gross margin percentage

43%

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 $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 companys 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 persons 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 Stores insurance relates to its fixtures.

g. The general office salaries and other expenses relate to the general management of Style, 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 is $8,000 per quarter.

Required (USE EXCEL):

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 Style, 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 grow margin is 43% of sales. What effect would these factors have on your recommendation concerning the Downtown Store? SHOW COMPUTATIONS and PRESENTED in EXCEL

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