Style, Inc. operates three stores in a large metropolitan area. The company’s se
ID: 2579802 • Letter: S
Question
Style, Inc. operates three stores in a large metropolitan area. The company’s segmented absorption costing income statement for the last quarter follows:
Style, Inc.
Income Statement
For the Quarter Ended March 31
Total
Uptown Store
Downtown Store
Eastpark Store
Sales
$ 2,500,000
$ 900,000
$ 750,000
$ 1,000,000
Cost of goods sold
1,450,000
513,000
522,000
565,000
Gross margin
$ 1,050,000
$ 387,000
$ 228,000
$ 435,000
Selling and administrative expenses:
Selling expenses:
Direct advertising
118,500
40,000
36,000
42,500
General advertising
20,000
7,200
4,800
8,000
Sales salaries
157,000
52,000
45,000
60,000
Delivery salaries
30,000
10,000
10,000
10,000
Store rent
215,000
70,000
60,000
80,000
Depreciation of store fixtures
46,950
18,300
8,800
19,850
Depreciation of delivery equipment
27,000
9,000
9,000
9,000
Total selling expenses
614,450
206,500
173,600
229,350
Administrative expenses:
Store management salaries
63,000
20,000
18,000
25,000
General office salaries
50,000
18,000
12,000
20,000
Utilities
89,800
31,000
27,200
31,600
Insurance on fixtures and inventory
25,500
8,000
9,000
8,500
Employment taxes
36,000
12,000
10,200
13,800
General office expenses-other
25,000
9,000
6,000
10,000
Total administrative expenses
289,300
98,000
82,400
108,900
Total operating expenses
903,750
304,500
261,000
338,250
Net operating income (loss)
$ 146,250
$ 82,500
$ (28,000)
$ 96,750
Additional Data:
Manager's salary per quarter
$ 18,000
New employee's salary per month
$ 5,000
Employment tax as a percentage of salaries
12%
Delivery person's salary per quarter
$ 7,000
Insurance related to downtown fixtures
1/3
Discharged employee's salary per quarter
$ 8,000
Assumed sales transferred to Uptown store
$ 200,000
Uptown store gross margin percentage
43%
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 $6,000 per month, or $18,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $5,000 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 12% 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 $7,000 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 Style, 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 is $8,000 per quarter.
Required (USE EXCEL):
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 Style, Inc.?
3. Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $200,000 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 grow margin is 43% of sales. What effect would these factors have on your recommendation concerning the Downtown Store? Show computations in Excel.
Style, Inc.
Income Statement
For the Quarter Ended March 31
Total
Uptown Store
Downtown Store
Eastpark Store
Sales
$ 2,500,000
$ 900,000
$ 750,000
$ 1,000,000
Cost of goods sold
1,450,000
513,000
522,000
565,000
Gross margin
$ 1,050,000
$ 387,000
$ 228,000
$ 435,000
Selling and administrative expenses:
Selling expenses:
Direct advertising
118,500
40,000
36,000
42,500
General advertising
20,000
7,200
4,800
8,000
Sales salaries
157,000
52,000
45,000
60,000
Delivery salaries
30,000
10,000
10,000
10,000
Store rent
215,000
70,000
60,000
80,000
Depreciation of store fixtures
46,950
18,300
8,800
19,850
Depreciation of delivery equipment
27,000
9,000
9,000
9,000
Total selling expenses
614,450
206,500
173,600
229,350
Administrative expenses:
Store management salaries
63,000
20,000
18,000
25,000
General office salaries
50,000
18,000
12,000
20,000
Utilities
89,800
31,000
27,200
31,600
Insurance on fixtures and inventory
25,500
8,000
9,000
8,500
Employment taxes
36,000
12,000
10,200
13,800
General office expenses-other
25,000
9,000
6,000
10,000
Total administrative expenses
289,300
98,000
82,400
108,900
Total operating expenses
903,750
304,500
261,000
338,250
Net operating income (loss)
$ 146,250
$ 82,500
$ (28,000)
$ 96,750
Additional Data:
Manager's salary per quarter
$ 18,000
New employee's salary per month
$ 5,000
Employment tax as a percentage of salaries
12%
Delivery person's salary per quarter
$ 7,000
Insurance related to downtown fixtures
1/3
Discharged employee's salary per quarter
$ 8,000
Assumed sales transferred to Uptown store
$ 200,000
Uptown store gross margin percentage
43%
Explanation / Answer
1. Change in Revenue if Downtown Store Closed: Total income will be reduced by 14800 as calculated below:
2. recommendation
Based on calculation in above step 1, since closing of store will reduce net income of 14,800, its not advisable to close this store.
3. If sale of uptown store increased by 200000 because of closure of downtown:
If sale increase by 200000, hence gross marging will be increase by 86000. However loss of income will be 14800 (as calculated in step one), therefore increase in income will be 86000-14800=71200. and hence, downtown store can be closed
Gross Margin Lost if Downtown Store Closed 228000 Cost Avoided if store closed: Direct Advertising 36000 Sales Salaries 45000 Delivery Salaries 7000 Store Rent 60000 Depreciation of Store Fixture 0 Since being moved to other store, cant be avoided Depreciation of Delivery Equipment 0 Since being moved to other store, cant be avoided Store Management Salaries 5000*3 15000 New poistion to be filled up if store to be operated at 5000 per month General Office Salaries 8000 as per Note G in question Utilities 27200 Insurance on Fixtures 0 Since being moved to other store, cant be avoided Insurance on Inventories 9000*2/3 6000 Since 1/3 is of Fixture, for inventory is 2/3 Employees Benefit (12% of 45000+7000+15000+8000) 9000 213200 Income lost if Downtown Store closed 14800