Power Music owns five music stores, where it sells music, instruments, and supplies. In addition, it rents instruments. At the end of last year, the new accounts showed that although the business as a whole was profitable, the Fifth Avenue store had shown a substantial loss. The income statement for the Fifth Avenue store for last month follows:

Additional computations:
aThese costs would be saved if the store was closed.
bThe rent would be saved if the store was closed.
cAssessed annually on the basis of average inventory on hand each month.
d8.5 percent of cost of departmental equipment. The equipment has no salvage value, and Power Music would incur no costs in scrapping it.
eAllocated on the basis of store sales as a fraction of total company sales. Management estimates that 10% of these costs allocated to the Fifth Avenue store could be saved if the store was closed.
fBased on average inventory quantity multiplied by the company's borrowing rate for three- month loans.

Analysis of these results has led management to consider closing the Fifth Avenue store. Members of the management team agree that keeping the Fifth Avenue store open is not essential to maintaining good customer relations and supporting the rest of the company's business. In other words, eliminating the Fifth Avenue store is not expected to affect the amount of business done by the other stores.

Required
What action do you recommend to Power Music's management? Write a short report to management recommending whether or not to close the Fifth Avenue store. Include the reasons for yourrecommendation.

Transcribed Image Text:

POWER MUSIC Fifth Avenue Store Partial Income Statement $1,950,000 1,680,000 $ 270,000 Gross margin . . Costs Payroll, direct labor, and supervisiona Rent... . 153,000 48,300 7,500 Administration and general office. Interest for inventory carrying costs... . . .. 13,500 360,000 $ (90,000) Loss. .