Power Music owns five music stores, where it sells music, instruments, and supplies. In addition, it rents
Question:
Additional computations:
a These costs would be saved if the store was closed.
b The rent would be saved if the store was closed.
c Assessed annually on the basis of average inventory on hand each month.
d 8.5 percent of cost of departmental equipment. The equipment has no salvage value, and
Power Music would incur no costs in scrapping it.
e Allocated 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.
f Based on average inventory quantity multiplied by the companys 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 companys 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 Musics management? Write a short report to management recommending whether or not to close the Fifth Avenue store. Include the reasons for yourrecommendation.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher