Mitch’s Markets, Inc., operates three stores in a large metropolitan area. The c
ID: 2583991 • Letter: M
Question
Mitch’s 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:
Mitch’s Markets, Inc.
Income Statement
For the Quarter Ended March 31:
*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:
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 $15,200 per month, or $45,600 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $9,000 per month.
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.
The general office salaries and other expenses relate to the general management of Mitch’s 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 $6,000 per quarter.
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. (Decreases should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)
Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $760,000 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 53% of sales.
Mitch’s 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:
Uptown Store Downtown Store West Loop Store 1,140,000 $3,619,000 $1,900,000' Cost of goods sold 1,872,500 893,000 682,100 297,400 Gross margin 1,746,500 1,007,000 457,900 281,600 Selling and administrative expenses: Selling expenses: 70,300 13,500 89,300 20,900 127,300 33,900 17,100 79,800 Direct advertising General advertising Sales salaries Delivery salaries Store rent Depreciation of store fixtures Depreciation of delivery equipment 172,300 25,700 202,300 47,800 286,900 61,400 39,100 22,200 79,800 20,900 119,700 16,600 33,200 6,000 39,900 10,900 4,900 Total selling expenses 835,500 372,300 342,000 121,200 Administrative expenses: Store management salaries General office salaries* Utilities Insurance on fixtures and inventory Employment taxes General office expenses-other* 106,500 63,000 136,300 36,200 50,900 29,400 45,600 33,100 58,900 14,900 21,100 15,400 45,600 19,800 60,800 16,800 23,100 9,300 15,300 10,100 16,600 4,500 6,700 4,700 Total administraive expenses 422,300 189,000 175,400 57,900 Total operating expenses 1,257,800 561,300 517,400 179,100 Net operating income (loss) $ 488,700 $ 445,700 (59,500) $ 102,500Explanation / Answer
Mitch’s market Inc. schedule showing the change in revenue and expenses
For the quarter ended March 31
Gross margin lost if the store is closed
457,900
Less costs that can be avoided
Direct advertising
79,800
Sales salaries
79,800
Delivery salaries
7,000
Store rent
119,700
Store management salaries(9,000*3)
27,000
General office salaries
23,100
Utilities
60,800
Insurance on inventories(16,800*2/3)
11,200
Employment taxes
23,100
(431,500)
Decrees in company net operating income
-$26,400
In adjustment number g. compensation to the employee $6,000 cannot be taken as cost saving. Because it is a general expenditure. Even though it is occur because of the closing of downtown store.
2. The downtown store should not be closed. Because it decrease the overall company profit.
3. Net increase in gross margin of uptown store = $760,000 * 53% =$ 402,800
Cost that can avoided by closing down the = $431,500
Gross margin loss if the store is closed = ($457,900)
Net advantage of closing down store = $376,400
Gross margin lost if the store is closed
457,900
Less costs that can be avoided
Direct advertising
79,800
Sales salaries
79,800
Delivery salaries
7,000
Store rent
119,700
Store management salaries(9,000*3)
27,000
General office salaries
23,100
Utilities
60,800
Insurance on inventories(16,800*2/3)
11,200
Employment taxes
23,100
(431,500)
Decrees in company net operating income
-$26,400