Thrifty Markets, Inc., operates three stores in a large metropolitan area. The c

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: Thrifty Markets, Inc. Income Statement For the Quarter Ended March 31 Total Uptown Store Downtown Store Westpark Store Sales $ 2,700,000 $ 1,000,000 $ 600,000 $ 1,100,000 Cost of goods sold 1,472,000 550,000 357,000 565,000 Gross margin 1,228,000 450,000 243,000 535,000 Selling and administrative expenses: Selling expenses: Direct advertising 114,900 30,000 42,000 42,900 General advertising* 11,000 4,074 2,444 4,482 Sales salaries 157,000 51,000 43,000 63,000 Delivery salaries 39,000 13,000 13,000 13,000 Store rent 208,000 69,000 63,000 76,000 Depreciation of store fixtures 46,900 18,300 8,700 19,900 Depreciation of delivery equipment 24,000 8,000 8,000 8,000 Total selling expenses 600,800 193,374 180,144 227,282 Administrative expenses: Store management salaries 72,000 23,000 21,000 28,000 General office salaries* 42,000 15,556 9,333 17,111 Utilities 91,600 30,000 31,000 30,600 Insurance on fixtures and inventory 23,100 7,200 8,200 7,700 Employment taxes 37,700 11,700 12,000 14,000 General office expenses—other* 21,000 7,778 4,667 8,555 Total administrative expenses 287,400 95,234 86,200 105,966 Total operating expenses 888,200 288,608 266,344 333,248 Net operating income (loss) $ 339,800 $ 161,392 $ (23,344 ) $ 201,752 *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 $7,000 per month, or $21,000 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 11% 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 $8,500 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 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 $9,000 per quarter. Required: 1. Prepare a schedule showing the change in revenues and expenses and the impact on the overall com

Explanation / Answer

Gross margin lost if the store is closed

$ 243,000

Less costs that can be avoided:

Direct advertising

$ 42,000

Sales salaries

$ 43,000

Delivery salaries

$ 8,500

Store rent

$ 63,000

Store management salaries (new employee would not be hired to fill vacant position at another store)

$ 18,000

General office salaries

$ 9,000

Utilities

$ 31,000

Insurance on inventories (2/3 × $8,200)

$ 5,467

Employment taxes {11% * ($43,000 + $8,500 + $18,000 + $9,000)

$ 8,635

$ 228,602

Decrease in company net operating income if the Downtown Store is closed

-$ 14,398

Gross margin lost if the store is closed

$ 243,000

Less costs that can be avoided:

Direct advertising

$ 42,000

Sales salaries

$ 43,000

Delivery salaries

$ 8,500

Store rent

$ 63,000

Store management salaries (new employee would not be hired to fill vacant position at another store)

$ 18,000

General office salaries

$ 9,000

Utilities

$ 31,000

Insurance on inventories (2/3 × $8,200)

$ 5,467

Employment taxes {11% * ($43,000 + $8,500 + $18,000 + $9,000)

$ 8,635

$ 228,602

Decrease in company net operating income if the Downtown Store is closed

-$ 14,398

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