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