Retail, Inc. operates three stores in its Region X sales territory. A segmented

Question

Retail, Inc. operates three stores in its Region X sales territory. A segmented absorption costing income statement for the company for the last quarter is as follows:
                                                            Region X
                                                    Income Statement
                                    For the Quarter Ended June 30, 20XX
                                                Total                Store#1                        Store#2            Store#3
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                          2,685,600           633,600                     1,080,000          972,000
S & A expense
     Selling                                   1,634,000          462,800                        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)     $ 285,600          $(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 administrative expenses are broken down as follows;
                                                Total                Store#1                        Store#2            Store#3
Selling expenses:
   Sales salaries                       $478,000         $140,000                     $178,000         $160,000
   Direct advertising                374,000         102,000                     144,000         128,000
   General advertising1                            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
1allocated on the basis of sales dollars.

                                              Total                Store#1                        Store#2            Store#3
Administrative expense:
   Store management
            salaries                        $140,000         $ 42,000                      $ 60,000          $ 38,000
   General office salaries1       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-other1           150,000            36,000                         60,000             54,000
Total administrative
            expense                       $766,000         $212,000                     $301,800         $252,200
1allocated 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 transferred 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 region 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 region has one delivery crew that serves all three stores. 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 region’s employment taxes are 15% of salaries.
   g] One-third of the insurance in store#1 is on the stores fixtures.
   h] The “General office salaries” and “General office-other” relate to the overall management of Region 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 Region’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 its sales would transfer to store#3. Store#3 has enough capacity to handle the increased sales. The increased 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.

Explanation / Answer

Retail, Inc. operates three stores in its Region X sales territory. A segmented

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