ACC Problem M4-1 – Retail, Inc.

Problem M4-1:Retail, Inc. operates three stores in its Region X sales territory. A segmented absorption costing income statement for the company for the last quarter is as follows:Region XIncome StatementFor the Quarter Ended June 30, 20XXTotal Store#1 Store#2 Store#3Sales $6,000,000 $1,440,000 $2,400,000 $2,160,000CGS 3,314,400 806,400 1,320,000 1,188,000Gross margin 2,685,600 633,600 1,080,000 972,000S & A expenseSelling 1,634,000 462,800 630,000 541,200Administrative 766,000 212,000 301,800 252,200Total expense 2,400,000 674,800 931,800 793,400Net operating income (loss) $ 285,600 $(41,200) $148,200 $178,600Store #1 has consistently shown losses over the past two years. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The company has provided you with the following information:a] Selling and administrative expenses are broken down as follows;Total Store#1 Store#2 Store#3Selling expenses:Sales salaries $478,000 $140,000 $178,000 $160,000Direct advertising 374,000 102,000 144,000 128,000General advertising1 90,000 21,600 36,000 32,400Store rent 600,000 170,000 240,000 190,000Depreciation-store fixtures 32,000 9,200 12,000 10,800Deliver salaries 42,000 14,000 14,000 14,000Depreciation-delivery equip . 18,000 6,000 6,000 6,000Total selling expense $1,634,000 $ 462,800 $ 630,000 $541,2001allocated on the basis of sales dollars.Total Store#1 Store#2 Store#3Administrative expense:Store managementsalaries $140,000 $ 42,000 $ 60,000 $ 38,000General office salaries1 100,000 24,000 40,000 36,000Insurance on fixtures &inventory 50,000 15,000 18,000 17,000Utilities 212,000 62,000 80,000 70,000Employment taxes 114,000 33,000 43,800 37,200General office-other1 150,000 36,000 60,000 54,000Total administrativeexpense $766,000 $212,000 $301,800 $252,2001allocated on the basis of sales dollars.b] The lease on store#1 can be broken with no penalty.c] The fixtures from store#1 would be transferred to the other two stores if store#1 is closed.d] The general manager of store#1 would be retained and transferred to another position in the region if store#1 is closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $22,000 per quarter. The general manager of store#1 would retain her current salary of $24,000 per quarter. All other employees of store#1 will be discharged.e] The region has one delivery crew that serves all three stores. One delivery person could be discharged if store#1 were closed; this person’s salary is $8,000 per quarter. The delivery equipment would be distributed to the other two stores. The equipment does not wear out thru use but does eventually become obsolete.f] The region’s employment taxes are 15% of salaries.g] One-third of the insurance in store#1 is on the stores fixtures.h] The “General office salaries” and “General office-other” relate to the overall management of Region X. If store#1 were closed, one person in the general office could be discharged because of the decrease in workload. This person’s compensation is $12,000 per quarter.Required:1] Prepare a schedule showing the change in revenues and expense and the impact on the Region’s overall net operating income that would result if store#1 were closed—assume all sales from store#1 would be lost. What do you recommend? Show all calculations.2] Now assume that if store#1 were closed, at least 25% of its sales would transfer to store#3. Store#3 has enough capacity to handle the increased sales. The increased sales in store#3 would yield the same gross margin as a percentage of sales as present sales in that store. What effect would these factors have on your recommendation? Show all computations to support your answer.