Store, Inc. does business in three stores in its Area X sales territory. A segmented absorption costing income statement for the company for the last quarter is as follows
Area X
Income Statement
Quarter Ended June 30
|
Total |
Store 1 |
Store 2 |
Store 2 |
| Sales |
$6,000,000 |
$1,440,000 |
$2,400,000 |
$2,160,000 |
| CGS |
3,314,400 |
806,400 |
1,320,000 |
1,188,000 |
| Gross Margin |
2,695,600 |
633,600 |
1,080,000 |
972,000 |
| S&A Expense |
|
|
|
|
| Selling |
1,634,000 |
462,000 |
630,000 |
541,200 |
| Administrative |
766,000 |
212,000 |
301,800 |
252,200 |
| Total Expense |
2,400,000 |
674,800 |
931,800 |
793,400 |
| Net Operating Income (loss) |
285,000 |
(41,200) |
148,200 |
178,600 |
Store 1 has consistently shown losses over the past two years. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The company has provided you with the following information:
a) Selling and adminstrative expenses are broken down as follows
|
Total |
Store 1 |
Store 2 |
Store 2 |
| Selling Expenses |
|
|
|
|
| Sales Salaries |
478,000 |
140,000 |
178,000 |
160,000 |
| Dirct Advertising |
374,000 |
102,000 |
144,000 |
128,000 |
| General 1 Advertising |
90,000 |
21,600 |
36,000 |
32,400 |
| Store Rent |
600,000 |
170,000 |
240,000 |
190,000 |
| Depreciation-store fixtures |
32,000 |
9,200 |
12,000 |
10,800 |
| Deliver salaries |
42,000 |
14,000 |
14,000 |
14,000 |
| Depreciation-delivery equip |
18,000 |
6,000 |
6,000 |
6,000 |
| Total Selling Expense |
1,634,000 |
462,800 |
630,000 |
541,200 |
1 Allocated on the basis of sales dollars.
|
Total |
Store 1 |
Store 2 |
Store 3 |
| Adminstrative Expense |
|
|
|
|
| Store Management Salaries |
140,000 |
42,000 |
60,000 |
38,000 |
| General Office Salaries |
100,000 |
24,000 |
40,000 |
36,000 |
| Insurance on fixtures & inventory |
50,000 |
15,000 |
18,000 |
17,000 |
| Utilities |
212,000 |
62,000 |
80,000 |
70,000 |
| Employment taxes |
114,000 |
33,000 |
43,800 |
37,200 |
| General office-other 1 |
150,000 |
36,000 |
60,000 |
54,000 |
| Total Administrative Expenses |
766,000 |
212,000 |
301,800 |
252,200 |
Allocated on the basis of sales dollars.
b) The lease on Store 1 can be broken with no penalty
c) The fixtures from Store 1 would be transfered to the other two stores if store 1 is closed
d) The general manager of store 1 would be retained and transferred to another position in the area if store 1 is closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of 22,000 per quarter. The general manager of store 1 would retain her current salary of 24,000 per quarter. All other employees of store 1 will be discharged.
e) The are has one delivery crew that serves all three strores. One delivery person could be discharged if store 1 were closed; this person's salary is 8,000 per quarter. The delivery equipment would be distributed to the other two stores. The equipment does not wear out thru use but does eventually become obsolete.
f) The area's employment taxes are 15% of salaries
g) one-third od the insurance in store 1 is on the store fixtures
h) The "General office salaries" and "General office-other" relate to the overall management of area x. If store 1 were closed, one person in the general office could be discharged because of the decrease in workload. This person's compensation is 12,000 per quarter
REQUIRED:
1) Prepare a schedule showing the change in revenues and expense and the impact on the Area's overall net operating income that would result if store 1 were closed - assume all sales from store 1 would be lost. What do you recommend? Show all calculations.
2) Now assume that if store 1 were closed, at least 25% of it's sales would transfer to store 3. Store 3 has enough capacity to handle the increased sales. The increases sales in store 3 would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation? Show all computations to support your answer.