The Tilots Corporation’s segmented absorption costing income statement for the last quarter for its three metropolitan stores is given below:

	Total			Uptown Store			Downtown Store			Westpark Store
Sales	$	2,500,000		$	900,000		$	600,000		$	1,000,000
Cost of goods sold		1,450,000			513,000			372,000			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			65,000			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			178,600			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
Employee benefits		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
Operating income (loss)	$	146,250		$	82,500		$	(33,000	)	$	96,750

*Allocated on the basis of sales dollars.

     Management is very concerned about the Downtown Store’s inability to show a profit, and consideration is being given to closing the store. The company has asked you recommend a course of action. Additional information available on the store is provided below:

1. 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 Downtown 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.
2. The lease on the building housing the Downtown Store can be broken with no penalty.
3. The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed.
4. Employee benefits are 12% of salaries.
5. A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this person’s 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.
6. One-third of the Downtown Store’s insurance relates to its fixtures.
7. The general office salaries and other expenses relate to the general management of the Tilots Corporation. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employee’s compensation amounts to $8,000 per quarter.

Required:
1. Prepare a schedule showing the change in revenues and expenses and the impact on the overall company operating income that would result if the Downtown Store were closed. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

2. Based on your computations in (1) above, what would you recommend to the management of the Tilots Corporation?

• The Downtown Store should be closed.

• The Downtown Store should not be closed.

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 gross margin is 43% of sales.

a. Calculate the Net advantage of closing the Downtown Store.

b. What recommendation would you make to the management of the Tilots Corporation’s?

• The Downtown Store should be closed.

• The Downtown Store should not be closed.

Answer rating: 100% (QA)

1 Gross margin lost if the store is closed 228000 Less costs that can be avoided Direct advertising ... View the full answer