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Thrifty Markets Inc. operates three stores in a large metropolitan area. The company's segmented...

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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 $ 3,100,000 $ 1,200,000 $ 600,000 $ 1,300,000
Cost of goods sold 1,582,000 660,000 356,000 566,000
Gross margin 1,518,000 540,000 244,000 734,000
Selling and administrative expenses: 123,000 38,000 42,000 43,000
Selling expenses:
Direct advertising
General advertising* 11,000 4,258 2,129 4,613
Sales salaries 154,000 51,000 42,000 61,000
Delivery salaries 36,000 12,000 12,000 12,000
Store rent 206,000 67,000 63,000 76,000
Depreciation of store fixtures 46,010 17,600 8,600 19,810
Depreciation of delivery equipment 27,000 9,000 9,000 9,000
Total selling expenses 603,010 198,858 178,729 225,423
Administrative expenses:
Store management salaries 74,000 24,000 21,000 29,000
General office salaries* 43,000 16,645 8,323 18,032
Utilities 90,600 29,000 32,000 29,600
Insurance on fixtures and inventory 22,500 7,000 8,000 7,500
Employment taxes 36,800 11,700 12,100 13,000
General office expenses?other* 23,000 8,903 4,452 9,645
Total administrative expenses 289,900 97,248 85,875 106,777
Total operating expenses 892,910 296,106 264,604 332,000
Net operating income (loss) 625,090 243,894 -20,604 401,800
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:
*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 $7,500 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 $10,000 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.
2. Based on your computations in (1) above, what recommendation would you make to the management of Thrifty Markets Inc.?                                                                        
The Downtown Store should not be closed.
The Downtown Store should be closed.
3, Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $400,000 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 45% of sales.
a. Calculate the Net advantage of closing the Downtown Store. (Any reductions or outflows should be indicated by a minus sign.)
b. What recommendation would you make to the management of Thrifty Markets Inc.?
The Downtown Store should be closed.
The Downtown Store should not be closed.

Management Decision-Making - Eliminating a Department:

When management is calculating the financial effect that closing a department will have, it should take care to take only relevant costs into consideration, a snot all costs on the financial reports will be avoidable and so some will be irrelevant.

Answer and Explanation:

Thrifty Markets, Inc.

Schedule showing the overall financial impact of closing the Downtown Store

Loss of sales revenue $(600,000)
Saving in :
Cost of goods sold 356,000
Direct advertising 42,000
General advertising
unavoidable so not relevant
0
Sales salaries 42,000
Delivery salaries
only the avoidable portion is relevant
7,500
Store rent 63,000
Depreciation on fixtures and delivery equipment
unavoidable so not relevant
0
Store manager salary
New appointment that will be avoided
18,000
General office salaries
only the avoidable portion is relevant
10,000
Utilities 32,000
Insurance
66.67% will be avoided
5,333
Employment taxes
11% on avoidable salaries ($42,000 + $7,500 + $18,000 + $10,000)
8,525
General office expenses - other
unavoidable so not relevant
0
Total avoidable cost $584,358
Net decrease in profit if the store is closed $(15,642)


2. I would recommend that the store is not closed, because closing it will lead to a decrease in profit.


3. a.) The impact would now be:

Loss of sales revenue $(600,000)
Saving in :
Cost of goods sold 356,000
Direct advertising 42,000
General advertising
unavoidable so not relevant
0
Sales salaries 42,000
Delivery salaries
only the avoidable portion is relevant
7,500
Store rent 63,000
Depreciation on fixtures and delivery equipment
unavoidable so not relevant
0
Store manager salary
New appointment that will be avoided
18,000
General office salaries
only the avoidable portion is relevant
10,000
Utilities 32,000
Insurance
66.67% will be avoided
5,333
Employment taxes
11% on avoidable salaries ($42,000 + $7,500 + $18,000 + $10,000)
8,525
General office expenses - other
unavoidable so not relevant
0
Total avoidable cost $584,358
Opportunity cost
Additional gross margin Uptown store
180,000
($400,000 x 0.45)
Net increase in profit if the store is closed $164,358


b.) I would now recommend that the store is closed.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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