Thrifty Markets, Inc., operates three stores in a large metropolitan area. The c
ID: 2380150 • Letter: T
Question
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:
*Allocated on the basis of sales dollars.
Management is very concerned about the Downtown Store’s 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 $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.
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 $8,000 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’s compensation amounts to $6,000 per quarter.
Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed. (Input all amounts as positive values. Do not round intermediate calculations. Round your intermediate and final answers to the nearest dollar amount. Omit the "$" 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 $300,000 per quarter due to loyal customers shifting their buying to the Uptown Store. The Uptown Store has ample capacity to handle the increased sales, and its gross margin is 44% of sales.
Calculate the Net advantage of closing the Downtown Store. (Negative amount should be indicated with a minus sign. Do not round intermediate calculations. Round your intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
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:
Explanation / Answer
ANSWER KEY
1. The simplest approach to the solution is:
Gross margin lost if the store is closed...................
$(228,000)
Less costs that can be avoided:
Direct advertising.............................................
$36,000
Sales salaries...................................................
45,000
Delivery salaries...............................................
7,000
Store rent.......................................................
65,000
Neo
Store management salaries (new employee would not be hired to fill vacant position at another store)...........................................................
15,000
General office salaries.......................................
8,000
Utilities............................................................
27,200
Insurance on inventories (2/3 × $9,000).............
6,000
Employment taxes*..........................................
9,000
218,200
Decrease in company net operating income if the Downtown Store is closed..................................
$ ( 9,800)
*Salaries avoided by closing the store:
Sales salaries....................................................
$45,000
Delivery salaries................................................
7,000
Store management salaries................................
15,000
General office salaries........................................
8,000
Total salaries.....................................................
75,000
Employment tax rate.........................................
× 12%
Employment taxes avoided.................................
$9,000
2. The Downtown Store should not be closed. If the store is closed, overall company net operating income will decrease by $9,800 per quarter.
Gross margin lost if the store is closed...................
$(228,000)
Less costs that can be avoided:
Direct advertising.............................................
$36,000
Sales salaries...................................................
45,000
Delivery salaries...............................................
7,000
Store rent.......................................................
65,000
Neo
Store management salaries (new employee would not be hired to fill vacant position at another store)...........................................................
15,000
General office salaries.......................................
8,000
Utilities............................................................
27,200
Insurance on inventories (2/3 × $9,000).............
6,000
Employment taxes*..........................................
9,000
218,200
Decrease in company net operating income if the Downtown Store is closed..................................
$ ( 9,800)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.