Question

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
	Total		Uptown Store		Downtown    Store		West Loop Store
Sales	$	4,583,000	$	2,600,000	$	1,560,000	$	423,000
Cost of goods sold		2,398,700		1,248,000		933,400		217,300
Gross margin		2,184,300		1,352,000		626,600		205,700
Selling and administrative expenses:
Selling expenses:
Direct advertising		221,600		96,200		109,200		16,200
General advertising*		32,600		18,500		11,100		3,000
Sales salaries		255,600		122,200		109,200		24,200
Delivery salaries		61,600		28,600		28,600		4,400
Store rent		367,300		174,200		163,800		29,300
Depreciation of store fixtures		77,200		46,400		22,800		8,000
Depreciation of delivery equipment		50,400		23,400		23,400		3,600
Total selling expenses		1,066,300		509,500		468,100		88,700
Administrative expenses:
Store management salaries		136,000		62,400		62,400		11,200
General office salaries*		80,000		45,400		27,200		7,400
Utilities		176,000		80,600		83,200		12,200
Insurance on fixtures and inventory		46,700		20,400		23,000		3,300
Employment taxes		65,300		28,900		31,600		4,800
General office expenses—other*		37,300		21,100		12,700		3,500
Total administrative expenses		541,300		258,800		240,100		42,400
Total operating expenses		1,607,600		768,300		708,200		131,100
Net operating income (loss)	$	576,700	$	583,700	$	(81,600)	$	74,600

*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:

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 $20,800 per month, or $62,400 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $6,000 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 company’s employment taxes are 18% of salaries.
e.	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 $6,000 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 Store’s insurance relates to its fixtures.
g.	The general office salaries and other expenses relate to the general management of Mitch’s 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 $9,000 per quarter.

Required:
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. (Decreases should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

        

2.

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

	The Downtown Store should be closed.
	The Downtown Store should not be closed.

3.	Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $1,040,000 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 52% of sales.
	Calculate the Net advantage of closing the Downtown Store.

Answer 1