ENVS 110 Lecture Notes - Lecture 7: San Jose City Hall
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Style, Inc. operates three stores in a large metropolitan area. The companyâs 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 storeâs 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 companyâs 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 personâs 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 Storeâs 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 employeeâs 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.