Reference no: EM13578768

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.