Question

Mitch’s Markets, Inc., operates three stores in a largemetropolitan area. The company’s segmented absorption costingincome statement for the last quarter is given below:

Mitch’s Markets, Inc. Income Statement For the Quarter Ended March 31
	Total		Uptown Store		Downtown Store		West Loop Store
Sales	$	3,749,000	$	2,000,000	$	1,200,000	$	549,000
Cost of goodssold		2,159,900		1,160,000		718,000		281,900
Gross margin		1,589,100		840,000		482,000		267,100
Selling andadministrative expenses:
Sellingexpenses:
Directadvertising		179,100		74,000		84,000		21,100
General advertising*		26,600		14,200		8,600		3,800
Sales salaries		208,800		94,000		84,000		30,800
Delivery salaries		49,500		22,000		22,000		5,500
Store rent		296,500		134,000		126,000		36,500
Depreciation of storefixtures		63,100		35,700		17,400		10,000
Depreciation of deliveryequipment		40,500		18,000		18,000		4,500
Total sellingexpenses		864,100		391,900		360,000		112,200
Administrative expenses:
Store management salaries		110,600		48,000		48,000		14,600
General office salaries*		65,300		34,900		20,900		9,500
Utilities		141,700		62,000		64,000		15,700
Insurance on fixtures andinventory		37,600		15,700		17,700		4,200
Employment taxes		52,900		22,200		24,300		6,400
General officeexpenses—other*		30,500		16,200		9,800		4,500
Totaladministrative expenses		438,600		199,000		184,700		54,900
Total operatingexpenses		1,302,700		590,900		544,700		167,100
Net operating income(loss)	$	286,400	$	249,100	$	(62,700)	$	100,000

*Allocated on the basis of sales dollars.

Management is very concerned aboutthe Downtown Store’s inability to show a profit, and considerationis being given to closing the store. The company has asked you tomake a recommendation as to what course of action should be taken.The following additional information is available about thestore:

a.	The manager of the store has been with the company for manyyears; he would be retained and transferred to another position inthe company if the store were closed. His salary is $16,000 permonth, or $48,000 per quarter. If the store were not closed, a newemployee would be hired to fill the other position at a salary of$6,000 per month.
b.	The lease on the buildinghousing the Downtown Store can be broken with no penalty.
c.	The fixtures being used in theDowntown Store would be transferred to the other two stores if theDowntown Store were closed.
d.	The company’s employment taxesare 18% of salaries.
e.	A single delivery crew serves all three stores. One deliveryperson could be discharged if the Downtown Store were closed; thisperson’s salary amounts to $8,000 per quarter. The deliveryequipment would be distributed to the other stores. The equipmentdoes not wear out through use, but it does eventually becomeobsolete.
f.	One-third of the DowntownStore’s insurance relates to its fixtures.
g.	The general office salaries and other expenses relate to thegeneral management of Mitch’s Markets, Inc. The employee in thegeneral office who is responsible for the Downtown Store would bedischarged if the store were closed. This employee’s compensationamounts to $6,000 per quarter.

Required:
1.	Prepare a schedule showing the change in revenues and expensesand the impact on the overall company net operating income thatwould result if the Downtown Store were closed. (Decreasesshould be indicated by a minus sign. Do not round intermediatecalculations. Round your final answers to the nearest dollaramount.)

2.

Based on your computations in requirement (1) above, whatrecommendation would you make to the management of Mitch’s Markets,Inc.?

	The Downtown Store should beclosed.
	The Downtown Store should not beclosed.

3.	Assume that if the Downtown Store were closed, sales in theUptown Store would increase by $800,000 per quarter due to loyalcustomers shifting their buying to the Uptown Store. The UptownStore has ample capacity to handle the increased sales, and itsgross margin is 42% of sales.
	Calculate the Net advantage ofclosing the Downtown Store.