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Relevant Costs on Closing Stores

Shadow Inc operates three stores in a large metroploliian area. The company's segmented absorption income statement for the last quarter is given below:

Total Uptown Downtown Westpark
Store Store 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 administration 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 equips. 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 & inventory 25,500 8,000 9,000 8,500
Employment taxes 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
Net operating expenses 146,250 82,500 (33,000) 96,750

Management is concerned about the downtown store inability to show profit, and considering on closing the store.
Additional information on the store:
a. The manager of the store has been with the company many years; he would be retained and transferred to another store if the store closes. His salary is 6,000 a month, 18,000 a quarter. If the store were not closed , a new employee would be hired with a starting position of 5,000 a month
b. The lease on the Downtown location can be broken w/ penalty
c. The fixtures would be transferred to the other two stores if the office salaries closed
d. The company's employment taxes are 12% of salaries
e. A single delivery crew serves all 3 stores. 1 delivery person would be discharged if the store closes, this person 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 eventually become obsolete.
f. One-third of the Downtown Store insurance relates to its fixtures
g. The general office salaries and other expenses relate to the general management of Shadow Inc, the person who is in charge of would be discharged if the store closed. This person makes 8,000 per quarter

Prepare a schedule showing the change in revenue and expenses and the impact on the overall company net operating income that would result if the Downtown store closed

What would you recommend to help save the store?

Assume that the store did close, sales for the Uptown store increased by $200,000 due to loyal customers shifting their buying. The Uptown store has ample capacity to handle the increased sales, and the gross margin is 43% of sales. What effect would these factors have on your recommendation concerning the Downtown store-Show computations?

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Solution Summary

The solution explains how to decide whether to close or retain a store using relevant costs

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