Style , Inc. Income Statement For the Quarter Ended March 31 Total Uptown Store
ID: 2580792 • Letter: S
Question
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.
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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%
l Verizon LTE 7:29 AM 28%) a wilmcol Ilblackboard.com Income Statement ScheduleExplanation / Answer
1 The simplest approach to the solution is: Gross margin lost if the store is closed ($228,000) Costs that can be avoided: Sales salaries 45,000 Direct advertising 36,000 Store rent 60,000 Delivery salaries 7,000 Store management salaries 15,000 General office compensation 8,000 Insurance on inventories ($9,000 × 2/3) 6,000 Utilities 27,200 Employment taxes* $ 9,000 213,200 Decrease in company profits if the Downtown store is closed (14,800) *Salaries avoided by closing the store: Sales salaries 45,000 Delivery salaries 7,000 Store management salaries 15,000 General office compensation 8,000 Total avoided 75,000 Employment tax rate x 12% Employment taxes avoided $ 9,000 Based on the data in (1), the Downtown Store should not be closed. If the store is closed, then the company’s overall net operating income will decrease by $14,800 per quarter. If the store space cannot be subleased or the lease broken with penalty, a decision to close the store would cause an even greater decline in the company’s overall net income. If the $60,000 rent cannot be avoided and the North Store is closed, the company’s overall net operating income would be reduced by $74,800 per quarter ($14,800 + $60,000). 2 Under these circumstances, the North Store should be closed. The computations are as follows: 3 Gross margin lost if the North Store is closed (part 1) ($228,000) Gross margin gained from the East Store: $200,000 × 43%* = $86,000 86,000 Net operating loss in gross margin ($142,000) Less costs that can be avoided if the North Store is closed (part 1) 213,200 Net advantage of closing the North Store $71,200