Damascus Ltd. operates three retail stores. The stores are located in close proximity to each other but are operated separately because they deal in different types of products. The following are summary income and expenditure accounts for the three stores for last month, produced by the company’s internal accounting system:

Hardware Interiors Gardening

Store Store Store

Sales K360,000 K625,000 K535,000

Less: Cost of goods sold K202,000 K320,000 K288,900

Gross profit K158,000 K305,000 K246,100

OTHER COSTS:

Salespersons’ salaries K36,000 K45,000 K42,000

Salaries of store managers & deputy managers K12,000 K16,000 K11,000

Depreciation of store fixtures K6,200 K8,000 K7,800

Store rent K40,000 K65,000 K50,000

Store lighting & heating K10,200 K19,000 K17,000

Local radio advertising costs K20,000 K34,000 K33,000

Share of newspaper advertising costs of

Damascus Ltd. K5,040 K8,750 K7,490

Share of head office salaries & expenses K20,160 K35,000 K29,960

Depreciation of delivery vehicles K1,400 K1,400 K1,400

Salaries of delivery vehicle crews K3,000 K3,000 K3,000

Employee fringe benefits K14,232 K19,800 K17,192

Net profit (loss) (K10,232) K50,050 K26,258

The managing director of Damascus Ltd. has suggested that the hardware store should be shut down because it has reported losses for several successive months. However the management accountant has warned of the need for careful analysis before any decision is made, and has assembled the following additional information:

1. If the hardware store were closed then all salespersons, managers and deputy managers employed in that store would be laid off. The only exception would be one manager who currently earns K7,000 per month and who would be transferred to Damascus Ltd.’s head office where she would work as an analyst and would continue to be paid her existing salary. If the hardware store were not closed then head office would recruit a new analyst who would be paid K5,000 per month.

2. If the hardware store were closed then all of its fixtures would be transferred for use in the company’s other stores.

3. The hardware store is located in a building which the company has leased for some years. The lease will expire shortly. The company must decide within the next three months whether or not to renew the lease for another ten year term.

4. Because the three stores carry very different product ranges, there are separate local radio

advertising campaigns for each store. However, the company places "general purpose"

advertisements in the newspapers to publicise the company name, and the costs of such advertising are allocated among the three stores in proportion to sales revenues.

5. Head office salaries and expenses are also allocated among the three stores in proportion to sales revenues.

6. Because the stores are located in close proximity to each other, they share a single set of delivery vehicles and crew. No vehicles would be disposed of if the hardware store were closed, but one crew member (whose salary is K2,000 per month) would be laid off because of the reduced work load.

7. The reduced workload due to the closure of the hardware store would also lead to the laying off of one administrative staff member at head office. This staff member is paid K3,500 per month.

8. The company incurs employee fringe benefits costs amounting to 20% of all salaries.

REQUIRED:

(a) Prepare calculations to indicate the increase or decrease in the short run monthly profit of Damascus Ltd. which would result from the closure of the hardware store. State and justify any assumptions which you make (11 marks)

(b) The manager of the hardware store has been summoned to make a presentation to the managing director, in which she must justify the argument that it makes good business sense in the long run for Damascus Ltd. to continue to operate the hardware store. She has devoted a lot of effort to developing the business of the hardware store, and believes that it can be very profitable in the long run, but she recognises that the managing director will not be easy to convince.

Explain three management accounting techniques which would be significantly useful to the

manager of the hardware store in making this presentation. In your answer, explain fully the

usefulness of your chosen techniques for this purpose.