Problem 10-23B Close or Retain a Store [LO10-2] Mitch\'s Markets, Inc., operates

Question

Problem 10-23B Close or Retain a Store [LO10-2] Mitch's 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: Mitch's Markets, Inc. Income Statement For the Quarter Ended March 31 Uptown Store West Loop 1,200,000 s 549,000 281,900 Downtown Store Total Store Sales $3,749,000 $2,000,000 $ Cost of goods sold 2,159,900 1,160,000 718,000 Gross margin 1,589,100 840,000 482,000 267,100 Selling and administrative expenses: Selling expenses Direct advertising General advertising Sales salaries Delivery salaries Store rent Depreciation of store fixtures Depreciation of delivery equipment 179,100 26,600 208,800 49,500 296,500 63,100 40,500 74,000 14,200 94,000 22,000 134,000 35,700 18,000 84,000 8,600 84,000 22,000 126,000 17,400 18,000 21,100 3,800 30,800 5,500 36,500 10,000 4,500 Total selling expenses 864,100 391,900 360,000 112,200

Explanation / Answer

Mitch’s Markets, Inc., Gross margin lost if the store is closed -$482,000.00 Less costs that can be avoided: Sales salaries $84,000.00 Delivery salaries $8,000.00 Store rent $126,000.00 Direct advertising $84,000.00 Store management salaries ($48000 -$48,000) $0.00 Salary of new manager (6000 x 3) $18,000.00 General office compensation $6,000.00 Insurance on inventories = 17700 x 2/3 $11,800.00 Utilities $64,000.00 Employment taxes (calculated below) $20,880.00 $422,680.00 Increase / (Decrease) in net operating income if the Downtown Store is closed -$59,320.00 Employment taxes Salaries avoided by closing the store: Sales salaries $84,000.00 Delivery salaries $8,000.00 Store management salaries ($24000 -$24,000) $0.00 Salary of new manager $18,000.00 General office compensation $6,000.00 Total avoided $116,000.00 Employment tax rate x 18% Employment taxes avoided $20,880.00 b) Based on the data in (1), the Downtown should not be closed. If the store is closed, then the company’s overall net operating income will decrease by $59320 per quarter.A decision to close the store would cause more decline in overall net income if the store space cannot be subleased or the lease broken without penalty. c) Gross margin lost if the Downtown Store is closed -482,000 Gross margin gained from the Khorfakkan Store: $800,000 x 42% $336,000 Net operating loss in gross margin. -$146,000 Less costs that can be avoided if the Downtown Store is closed (part 1) 422,680.00 Net advantage of closing the North Store $276,680

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