Astrid Enterprises has five stores, three of which are very profitable and two of which are losing money. The company’s president, Astrid Moore, is trying to decide whether to close one or both of the stores. The following income statements are presented for the two stores:

If the two stores are closed, the corporate expense will be allocated to the other three stores, and the salaries for the store managers will be eliminated. The advertising expense is specific to each store, so that expense would be eliminated as well. The rent for Store One is $125,000 per year plus 10 percent of the sales dollars. The lease, signed 6 months ago, is for 5 years and cannot be canceled. The rent for Store Two is $16,666.67 per month and can be canceled with 30-days notice.

Required

A. What items on each income statement are relevant to the decision to close each store?

B. What would you recommend that management do? Why?

Transcribed Image Text:

Store One (in local mall) Store Two (in strip mall) Sales $1,250,000 Sales $1,000,000 Cost of sales 800,000 Cost of sales 700,000 Gross margin $ 450,000 Gross margin $ 300,000 Rent 250,000 Rent 200,000 Advertising 50,000 Advertising 50,000 Corporate expense 75,000 Corporate expense 75,000 Salaries 125,000 Salaries 90,000 Net income $ (50,000) Net income $ (115,000)