Thrifty Markets, Inc., operates three stores in a large metropolitan area. The c

Question

Thrifty Markets, Inc., operates three stores in a large metropolitan area. The company%u2019s segmented absorption costing income statement for the last quarter is given below:

*Allocated on the basis of sales dollars.

Management is very concerned about the Downtown Store%u2019s 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:

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.

A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this person%u2019s salary amounts to $9,000 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.

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%u2019s compensation amounts to $6,000 per quarter.

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. (Input all amounts as positive values. Round your intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

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

Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $300,000 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 46% of sales.

Calculate the Net advantage of closing the Downtown Store. (Negative amount should be indicated with a minus sign. Round your intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Thrifty Markets, Inc.
Income Statement
For the Quarter Ended March 31
Total Uptown
Store Downtown
Store Westpark
Store Sales $ 2,900,000 $ 1,100,000 $ 600,000 $ 1,200,000 Cost of goods sold 1,520,000 594,000 359,000 567,000 Gross margin 1,380,000 506,000 241,000 633,000 Selling and administrative expenses: Selling expenses: Direct advertising 114,800 32,000 40,000 42,800 General advertising* 17,000 6,448 3,517 7,035 Sales salaries 156,000 52,000 43,000 61,000 Delivery salaries 33,000 11,000 11,000 11,000 Store rent 207,000 69,000 62,000 76,000 Depreciation of store fixtures 46,010 17,500 8,700 19,810 Depreciation of delivery equipment 30,000 10,000 10,000 10,000 Total selling expenses 603,810 197,948 178,217 227,645 Administrative expenses: Store management salaries 79,000 25,000 24,000 30,000 General office salaries* 46,000 17,448 9,517 19,035 Utilities 98,600 33,000 32,000 33,600 Insurance on fixtures and inventory 22,800 7,100 8,100 7,600 Employment taxes 37,200 11,100 12,800 13,300 General office expenses%u2014other* 21,000 7,966 4,345 8,689 Total administrative expenses 304,600 101,614 90,762 112,224 Total operating expenses 908,410 299,562 268,979 339,869 Net operating income (loss) $ 471,590 $ 206,438 $ (27,979 ) $ 293,131

Explanation / Answer

2. The Downtown Store should not be closed

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3. b

The Downtown Store should be closed.

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